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Re: Explain the 4% withdrawal rate
Old 01-18-2006, 07:09 PM   #81
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Re: Explain the 4% withdrawal rate

A great thread...thank you all!!
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Re: Explain the 4% withdrawal rate
Old 01-19-2006, 07:00 AM   #82
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Re: Explain the 4% withdrawal rate

Quote:
Originally Posted by Sheryl
This has been a great thread.* I'm happy to see a lot of the things I've been thinking about being posted, without me having to type them.* *

Personally I feel a lot more comfortable with the option of taking 4% of the current portfolio at whatever it happens to be that year -* essentially, as Dory said,* "starting over" with a current plan each year.* *This is more intuitive and more interactive* - the 4% of original + inflation adjustment seems too robotic and possibly counter to logic.

If I get to a year where the 4% of existing is not enough to live on, I know I have a problem and better find alternate income sources.* *If my investments do great my 4% will give me a more comfortable life, and if I don't need it all I may not spend it or may save it for a major purchase if things continue to go well.

As many on this forum have often said, you must use some common sense with the formulas!
*
I particularly like the approach ESRBob outlined, the 4%/95% method. Seems more appropriate to me for very early retirees who perhaps maintain a small side business or do a little paid work now and then.
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Re: Explain the 4% withdrawal rate
Old 01-19-2006, 08:26 AM   #83
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Re: Explain the 4% withdrawal rate

Thanks Dory,

Excellent thread. A lot of good discussion in this one and very helpful for those not sure about the whole 4% SWR thing.


At the end of the day, how much you take out is determined by:

1. Current market conditions--an up market allows a larger income while a down market should make you re-evaluate your situation to see if you need to cut back or stay the same. It all depends on your individual situation and where you are in your life.

2. The amount of other income sources you may have. FIRECalc uses ALL of your nest egg, which includes both pre and post tax accounts. It also takes into account pensions and other income streams from SS etc. If you have significant (relative to your income needs) sources of income other than retirement accounts then your nest egg can be smaller or you can take more of it each year than a person without these other sources.

3. The volitility of your personal expenses plays a major part too. If you can adjust your expenses down in a down market then your SWR can adjust up or down to reflect the market. A static and top heavy expense profile without addtional income streams will require the greatest amount of withdraw from your retirement accounts and will need to be monitored closely and rebalanced frequently to assure you don't run out before your life does.

4. Your investment mix play a huge part in SWR. The more fixed income you have the less you can take out over time since, on average, the return rate will be lower than if you were heavier into equities. However, an extended down market with a high equities holdings percent can hurt you; maybe even more since the loss could be much higher than the loss due to inflation with fixed income investments. You math wizards can figure this one out.

Not trying to be redundant; just thought it might be helpful to have a summary of the basics up to now.
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Re: Explain the 4% withdrawal rate
Old 01-19-2006, 08:46 AM   #84
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Re: Explain the 4% withdrawal rate

Great summary Steve.

This thread has been a real help in my thinking through our personal situation -* Making the transition from "young dreamer" to ESR in the next year or so.

Number 3 on your summary is a big concern to me right now -* "volitility of personal expenses."* What happens when we need/want a new car, or that $20,000 trip to Antarctica?* Those things can't be part of an annual budget but have to be considered.* * My current plan allows for setting $5,000 of each year's SWR into a capital replacement fund - which has to cover cars, roofs, etc.* *Things like water heaters and dishwashers can fit into a "miscellaneous" catagory without blowing the budget.* I'm also budgeting $15,000 per year for travel - which some may find outrageous, but to me it's the REASON for ESR.

I doubt I will put that $5k or $15k into some special account. I'll just sort of note in the back of my mind that it wasn't withdrawn that year, and then when it comes to buying a $20k item, it's still going to feel like a big hit to the nest egg.*

I guess we just have to make the leap of faith and trust that the details will work out.
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Re: Explain the 4% withdrawal rate
Old 01-19-2006, 08:50 AM   #85
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Re: Explain the 4% withdrawal rate

Quote:
Originally Posted by Sheryl
I guess we just have to make the leap of faith and trust that the details will work out.
I think that's the bottom line. We can sit around and play with firecalc and other tools all day, but ultimately you pays your money and you takes your chances.
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Re: Explain the 4% withdrawal rate
Old 01-19-2006, 08:53 AM   #86
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Re: Explain the 4% withdrawal rate

Quote:
Originally Posted by brewer12345
I think that's the bottom line.* We can sit around and play with firecalc and other tools all day, but ultimately you pays your money and you takes your chances.
Yup! I went through a phase of obseesing playing with FIRECalc - couldn't stay away from it. Now I'm getting sort of bored with fiddling - I have dozens of scenarios, but all are between 85 and 100% success rate... I'm ready to "just do it."

Actually SO is going to "just do it" I am going to join the likes of TH and JG's spouses and keep working, maybe two more years. Mostly for the health insurance.
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Re: Explain the 4% withdrawal rate
Old 01-19-2006, 09:39 AM   #87
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Re: Explain the 4% withdrawal rate

Lucky me - launched into ER via lay off in 1993 and long before I ever heard of ER.

Handgrenades are (I believe) a no no for most civilians - so I putz along in ER and use FireCalc as a 'keep me in the ballpark' gut check. Like a flu shot it helps prevent periodic 'brilliant investment idea' attacks.

This be a good thread.

heh heh heh
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Re: Explain the 4% withdrawal rate
Old 01-19-2006, 09:40 AM   #88
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Re: Explain the 4% withdrawal rate

Quote:
Originally Posted by Sheryl
This has been a great thread.* I'm happy to see a lot of the things I've been thinking about being posted, without me having to type them.* *

Personally I feel a lot more comfortable with the option of taking 4% of the current portfolio at whatever it happens to be that year -* essentially, as Dory said,* "starting over" with a current plan each year.* *This is more intuitive and more interactive* - the 4% of original + inflation adjustment seems too robotic and possibly counter to logic.

If I get to a year where the 4% of existing is not enough to live on, I know I have a problem and better find alternate income sources.* *If my investments do great my 4% will give me a more comfortable life, and if I don't need it all I may not spend it or may save it for a major purchase if things continue to go well.

As many on this forum have often said, you must use some common sense with the formulas!
*
I think that Sheryl has it exactly right....at least in terms of MY comfort level....

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Re: Explain the 4% withdrawal rate
Old 01-19-2006, 10:09 AM   #89
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Re: Explain the 4% withdrawal rate

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Re: Explain the 4% withdrawal rate
Old 01-19-2006, 10:28 AM   #90
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Re: Explain the 4% withdrawal rate

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Re: Explain the 4% withdrawal rate
Old 01-19-2006, 10:29 AM   #91
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Re: Explain the 4% withdrawal rate

Quote:
Originally Posted by Sheryl
I guess we just have to make the leap of faith and trust that the details will work out.
If you consider the range of details that you cant control in your working life (that can have wide ranging effects on your life) vs the ones in an ER life, I think you'll find that the latter can be a lot more comfortable...for example, my porfolio cant lay me off or fire me or go out of business, and I cant get a new manager who is an idiot and makes my life miserable...

Quote:
Originally Posted by Sheryl
Actually SO is going to "just do it" I am going to join the likes of TH and JG's spouses and keep working, maybe two more years. Mostly for the health insurance.
Thats a good transition. Consider what we do, where we get the health care (huge), then use pre-tax plans (her 403b) to severely reduce the taxable ordinary income, then fund Roths for both of us, then use the residual to pay the regular monthly bills, reducing our withdrawal rate. Then she cut her hours to the point where we're skimming along just atop the amount we need to fund all of that, which is almost half what she worked when she was single.

She was going to quit in 5-7-10 years, but now she says she'll probably always work for a day or two a week. With the qualifier that if any nationalization or statewide "all in" healthcare plan materializes where we can be covered for free or for low cost, she'll probably bail.

Methinks she enjoys the "vacation" from me and Gabe a few days a week
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Re: Explain the 4% withdrawal rate
Old 01-19-2006, 05:05 PM   #92
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Re: Explain the 4% withdrawal rate

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Originally Posted by ()

Thats a good transition.* Consider what we do, where we get the health care (huge), then use pre-tax plans (her 403b) to severely reduce the taxable ordinary income, then fund Roths for both of us, then use the residual to pay the regular monthly bills, reducing our withdrawal rate.* Then she cut her hours to the point where we're skimming along just atop the amount we need to fund all of that, which is almost half what she worked when she was single.
Sounds about right. As Goethe, or maybe Nike said, we need to Just Do It!
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Re: Explain the 4% withdrawal rate
Old 01-21-2006, 09:50 PM   #93
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Re: Explain the 4% withdrawal rate

Dory,
Thanks for all your coherent explanations. This really is a subject that tho it has been previously discussed, needs to be thoroughly understood. Those of us not yet drawing down on our portfolios need to better understand the ins and outs. This is very helpful.

All of us have different situations, and I tend to be a WEE bit conservatiive. Think belt and suspenders! So, I am planning for more of a 20% stock/80% fixed portfolio, with more like a 3% SWR. I also figure I'm gonna live forever, and if I end up with money at the end more power to our kids! If you figure a high budget vs. low (bad year) budget, don't pull the "max" SWR all the time, have some sort of back up (SS, pension, real estate to sell, etc.), I think that is the prudent way to go. Again, I know I'm a chicken little, but I will sleep better with this plan (100% FireCalc survival). Before you pull the plug, have your bases covered, or as per ESR Bob's advise, be ready to work part-time if the going gets rough. Just my view - YMMV.

An aside to Sheryl, if you are just working for insurance, I assume you have looked into premiums and were unhappy with cost. We were fortunate to get individual policies for our family of 4 for Blue Cross/Blue Shield all basically healthy, DH is 52 and costs about $133/mo with $2500 deductable, mine is about $100/mo (I'm 44). Just hate to think of you sweating away working when you could be diving!!! [BTW your current avatar always makes me think it's Martha's - they look similar out of the corner of your eye!]

TTFN, Jane

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Re: Explain the 4% withdrawal rate
Old 01-21-2006, 10:15 PM   #94
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Re: Explain the 4% withdrawal rate

Quote:
Originally Posted by Jane_Doe
An aside to Sheryl, if you are just working for insurance, I assume you have looked into premiums and were unhappy with cost.* We were fortunate to get individual policies for our family of 4 for* Blue Cross/Blue Shield all basically healthy, DH is 52 and costs about $133/mo with $2500 deductable, mine is about $100/mo (I'm 44).*
That sounds like a great deal if it offers decent coverage. How are the yearly max out of pocket, copays, and percent covered?

As I research health care it seems like the yearly max out of pocket is in some ways the most important attribute of plans but is rarely mentioned.
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Re: Explain the 4% withdrawal rate
Old 01-22-2006, 10:42 PM   #95
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Re: Explain the 4% withdrawal rate

Oh my - I've been moving for the past few days and noticed about 4 more pages of responses. Dory lost me somewhere on page 3, I'm gonna have to go back and read everything.
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Re: Explain the 4% withdrawal rate
Old 01-23-2006, 08:49 AM   #96
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Re: Explain the 4% withdrawal rate

Do go back and read, Virginia. This has been one of the best threads on this board, for those of us still puzzling through how to implement a withdrawal.

Jane, I KWYM about about the blue avatar - I thought the same thing - it's probably time for a change.

I'm not just working for the health insurance - I want to hord up another year or two of 401k contributions, "just to be safe," and it is going to take me a couple years to extricate myself from my current possition without burning bridges. I have projects I need to see through to completion, for my own sense of closure.

Plus - S.O. is going to ESR in July and he's very insecure about both of us quitting all at once. Whether he's going to ER or ESR isn't clear yet - He will be looking around to see what sort of project interests him, but won't NEED to work.

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Old 05-30-2007, 02:08 PM   #97
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The early withdrawal studies generally centered on – constant 60/40 market weight portfolios, 25 year withdrawal periods, using U.S. market returns and volatility

Resulting in 4% of initial portfolio value + annual inflation withdrawals, no resetting

Lower starting withdrawals or overweighting of equities for longer withdrawal periods
------------------------------------------------------------------------------------------------------------
In short, you divide your money over your initial life expectancy while keeping a market weight portfolio, assuming the higher stock mix will offset lower returns due to volatility.

Using the above formulation, a 33 year withdrawal starts at 3%, a 20 year at 5%. Or you
overweight equities, praying (not planning) that irregular capital gains pay regular bills.

But two weaknesses arise – the small sample size used plus investor costs and actions
- Almost all other countries had lower returns, higher volatility, longer bad runs
- Ever more conservative retirees, investing costs, lower dollar weighted returns

This suggests that the offsetting growth needed for the ‘automatic’ inflation adjustment is rarely achieved in real life, leaving only the initial life expectancy equivalent withdrawal rate – you’re likely just dividing your money over your remaining life expectancy.

(taking “Triumph of the Optimists” as a proxy for market data, the 1926 – 2000 U.S. period commonly used is only 5% of the years in their sample, or 6.7% of 15 countries)

Dividing your money yearly over your remaining life expectancy, in essence assuming 0% real returns, results in some interesting features – after tax fixed pensions can be discounted using life expectancy, advancing life expectancy stretches portfolio, annual division resets withdrawal amount, allocation can be set using withdrawals and portfolio cash flow, can crudely adjust pension for joint & survivor option, works with a wider range of allocations, and the ever increasing withdrawal rate may adjust for inflation if you are invested to do so, otherwise you are spending your portfolio down.

Divide after tax fixed pensions and mixed portfolios annually over IRS life expectancy.

Calculate withdrawals annually, spending the lesser of the new divisions or the previous yearly + inflation. Average together to reduce annual spending change. Portfolio unused for draws used as retirees savings. Maintain insurance to protect against personal losses.

More complicated withdrawal rules are likely spurious patterns due to small sample size.

Replacement = net income – mortgage – investing + replaced benefits
Stock, reit expected real return = (1/pe) – cost
Bond, bill expected real return = yield – inflation – cost
SS draw = [(payment – med b) – tax] x (age/life)
Fixed pension withdrawal = (payment – tax) x (age/life)
J & S pension = expected payment x (single/joint life)
Tax deferred fund withdrawal = balance/life/12 - tax
Taxable fund withdrawal = balance/life/12
Bond percentage = (draws – cash) x 12/bond %
Estimated savings = (total draws – replacement) x 12 x life
IRS publication 590 standard withdrawal life expectancies

(SS after Medicare b deduction treated as a fixed pension due to rising healthcare costs)

Cooley, Hubbard, Walz “Sustainable withdrawals from your retirement portfolio” paper
1999 reprise of their 1998 paper, with short synopsis of other work.
Dichev “What were stock investors actual historical returns?” paper
Dimson, Marsh, Staunton “Irrational optimism” paper
Dimson, Marsh, Staunton “Triumph of the optimists” book
Ervin “Shortfall risk, asset allocation, and over funding a retirement account” paper
Frazzini “Dumb money: mutual fund flows and the cross-section of stock returns” paper
Hebeler “The simplest retirement plan for retirees” (analyzenow.com)
Jorion “Long term risks of global stock markets” paper
Jorion, Goetzmann “Global stock markets of the 20th century” paper
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