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Old 01-27-2008, 03:52 PM   #41
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And guys, if your showing long term charts you need to do it with semilog on the y-axis or it just doesn't give the right picture for growth rates.
Depends on whether you're trying to show long-term growth or bull runs and bear declines. There's no "one scale fits all."
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Old 01-27-2008, 03:59 PM   #42
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I was relieved to find that I could withdraw up to $100K without going over an SWR of 3%.
Don't forget that if you simply stick your money under your mattress, you can safely withdraw 3.33% (not adjusted for inflation) over 30 years.

That doesn't mean your mattress is a great asset class, but that's what we should use as a baseline.
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Old 01-27-2008, 04:06 PM   #43
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Depends on whether you're trying to show long-term growth or bull runs and bear declines. There's no "one scale fits all."
Assuming you are showing this long term series on the same graph, I'd like to see an example of how the linear graph is better then the semilog. Blue bunnies can be very skeptical guys.
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Old 01-27-2008, 04:13 PM   #44
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Don't forget that if you simply stick your money under your mattress, you can safely withdraw 3.33% (not adjusted for inflation) over 30 years.

That doesn't mean your mattress is a great asset class, but that's what we should use as a baseline.
I adjusted withdrawals for inflation at 3% per annum. The mattress generates no MERs, but is associated with the risk of fire or theft!

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Old 01-27-2008, 04:15 PM   #45
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This is where LBYM'ers have a huge advantage over fans of yuppie consumerism. We can cut back pretty easily, especially if it is just for a few years.

I think the opposite is more doable. If you are living on your total income, and spending for non essentials, then tightening the belt is possible. If you have always LBYM, then there is no stretch room. We have always saved, and you can tell by the absence of new furniture (old beaten up furniture because of moving every 3 years) absence of new cars (not gonna take that first few years hit) and no vacations (haven't been out of my town for 3 years). I don't know where to cut. I have to say we don't scrimp your groceries. DH is a meat eater, but we don't eat out much. I'd hate to see the market keep up like it has.
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Old 01-27-2008, 04:16 PM   #46
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Here's a semilog of the S&P 500 in nominal terms. I wasn't able to find one in real terms, which would better show the 1968-1982 results.



But, I guess you're right in that the dips still show. The log scale just reduces the magnitude of recent changes. Still scary looking, don't you think?
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Old 01-27-2008, 04:33 PM   #47
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Twaddle, well you do have to use your imagination on that 1968-1982 period based on that graph sans inflation. I guess that long period of daylight between the green line from the late 80's to now might be even more scary. That's the trouble with graphs though, a lot of ways to interpret them. I think it's time for the bunny to go into the hole.
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Old 01-27-2008, 04:34 PM   #48
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I think the opposite is more doable. If you are living on your total income, and spending for non essentials, then tightening the belt is possible. If you have always LBYM, then there is no stretch room.
This seems right to me. While you are working, so what if you earn $200,000 and live on $60,000? What counts is your excess funding once you retire. And excess over what it takes to live reasonably well wherever you are or want to be. Remember we are talking about retiring voluntarily, not being refugees from a war, or displaced peple from a natural or economic disaster. In most places a couple can live OK on $60,000, and an individual on $40,000. Not great, but OK.

So if you retire with $2mm you do have some wiggle room, and obviously more room with more money. But put it down to $1.5mm for a withdrawal of $60,000, and the couple has less room. Not that you can't get cheaper, but better be sure that DH and DW are on the same page, that inflation stays contained, that medical insurance stays no more unaffordable than it is now, etc., etc.

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Old 01-27-2008, 05:26 PM   #49
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I feel fairly confortable with a 4% SWR, even knowing that I could end up with nothing at the end. But I will enjoy the luxury to have a few backups (in case things go south) to keep me sleeping at night:

Social Security benefits which I never include in my projections.
A substantial inheritance which I will probably receive after FIREing, so again not included in my projections.
Home equity, which can be tapped via reverse mortgage if needed, is not included in my calculations.
A retirement budget consisting of 50% fixed expenses and 50% discretionary expenses. So if the market really plunges our expenses could be cut in half temporarily.
A proven ability to live cheaply and be happy with it.
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Old 01-27-2008, 05:46 PM   #50
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I feel fairly confortable with a 4% SWR, even knowing that I could end up with nothing at the end. But I will enjoy the luxury to have a few backups (in case things go south) to keep me sleeping at night:

Social Security benefits which I never include in my projections.
A substantial inheritance which I will probably receive after FIREing, so again not included in my projections.
Home equity, which can be tapped via reverse mortgage if needed, is not included in my calculations.
A retirement budget consisting of 50% fixed expenses and 50% discretionary expenses. So if the market really plunges our expenses could be cut in half temporarily.
A proven ability to live cheaply and be happy with it.
So you've got these backup sources that you could tap into if you need them (and they are part of your planning, since they are your cushion and let you sleep at night). You say you've got some discretionary spending. Given all this, why not just take your 4% at the end of each year's total? That way there's no chance of going broke, there's no market timing involved, there's no need to try to figure out how long the bad times will last. If the market does well, enjoy the money while you're young enough to really use it. If the market goes down, make your adjustments in annual withdrawal/spending early in any downturn (reducing the number of devalued shares you sell and significantly enhancing the chance of an eventual recovery of your portfolio).
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Old 01-27-2008, 06:06 PM   #51
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So you've got these backup sources that you could tap into if you need them (and they are part of your planning, since they are your cushion and let you sleep at night). You say you've got some discretionary spending. Given all this, why not just take your 4% at the end of each year's total? That way there's no chance of going broke, there's no market timing involved, there's no need to try to figure out how long the bad times will last. If the market does well, enjoy the money while you're young enough to really use it. If the market goes down, make your adjustments in annual withdrawal/spending early in any downturn (reducing the number of devalued shares you sell and significantly enhancing the chance of an eventual recovery of your portfolio).
Well, some of the backups I listed are still not guaranteed. I might not get a cent in SS benefits for example (I am only 33 so who knows if SS will still be there for me) and my parents could eat up their entire estate and leave me nothing (though that's very unlikely). So in those events, I may have to rely on slashing my expenses for a few years and drawing less from my portfolio. If I get both SS and inheritance, then you are right, there will be no need for me to cut my expenses and draw less than 4% of my personal portfolio each year in case of a downturn.
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Old 01-27-2008, 06:43 PM   #52
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I plan to stick close to a 2.5% w/d rate in the early years for the very reason brought out in this thread. Since I am only 53, I could have 35-40 years to live so I think it is prudent to go with a lower rate. Fortunately, it's not a burden as I can live as I always have. But when I reach SS age, I will probably not reduce my w/d rate by what I receive in SS benefits.(assuming my portfolio is in good shape) At that point, I think I should be in good shape to blow it out a little. Unclemick, you listening?
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Old 01-27-2008, 07:04 PM   #53
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My head hurts after reading all of the above.

I know two things: (1) my portfolio is way down; and (2) it will go back up in time. In the meantime, I can live on 4% SWR of what's left. I just hope it doesn't continue to decline much more. My retirement date is August 1, and I'm going through with it if at all possible.
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Old 01-27-2008, 08:59 PM   #54
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On December 31 each year, I total up our assets and re-run FIRECALC; based on 95% success and living to 100. Adjust the next year's withdrawl accordingly.

I'm already taking SS early, have a small-moderate pension (non-COLA), wife gets early SS in two years. Plus a larger portion of bonds/CD's than many folks. So, spending reductions should be less than folks with no pension and a high equity percentage. Works for me, but YMMV.
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Old 01-27-2008, 09:56 PM   #55
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Wow - got back to find ~ 50 responses to my original post. I was hoping someone would point out my error, and make me feel better - no such luck

Where to start? Well, how about with something pro-active? I agree with the posts that state that we would cut our spending when the portfolio goes down significantly. But when/how? Since we can't predict the future, we wouldn't know if a 30% decline was a blip that we could safely ignore, or the start of a protracted downturn. So we would need to mechanically 'just do it'. It would be interesting to see an algorithm like that in FireCalc, but there are a million ways to do it. I wonder how much a 'soft adjustment' would help?

I'm picturing something like: Don't increase your inflation adjusted SWR when your net worth rises, but if it dips below that support level, cut your spending by half that deficit. Less drastic than a one-for-one cut. I wonder how much that would cushion the dips?

Example: If your SWR was 4.0% of a $1M portfolio, and your inflation adjusted portfolio dropped to $800,000 (a 20% drop), drop your spending to an inflation adjusted 3.6% (a 10% drop in spending).

Or an ~ 2% SWR as HaHa states, would limit the dips to 50%. A variable spending plan on a somewhat higher SWR sounds more attractive to me (if it works!). It would only come into play in those 'bad case' scenarios.

For me, cutting spending anytime over the next ten years is a moot point. DW would say 'Hmmm, time to go back to work?'. No way to win that discussion

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Old 01-27-2008, 09:58 PM   #56
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Now, on to a few counter-points:

2B - " ... A 4% SWR is hyper conservative unless you retire right in front of a major market downdraft .... "

I would agree if the graph showed only a few 'outlier' years like that. But as I said, the worst case year had plenty of company, there were many 'almost as bad' years. It is not a a 'doom and gloom' view, but it reflects the reality of what retirees have faced in the past. As time goes on, one should expect even worse outcomes to appear (records were made to be broken).

And just a reminder, I'm not focused on the 'ending value', but the interim dips that we need to face.

I'm not sure what to make of some of the comments about 'ultra-safe' investments. In an inflationary environment, would 'ultra-safe' (fixed?) investments help, or hurt? Seems we would need a crystal ball to know what is 'ultra-safe', right? Do i-bonds fit the bill?

-ERD50
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Old 01-28-2008, 05:40 AM   #57
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Reality - You withdraw at 4%. If the market has a series of bad years and you see your stash get smaller - you adjust downward. (wouldn't everybody)

If you don't have a plan to downsize if necessary then you don't really have a plan. If you can't downsize then you didn't start with enough money.

The odds of a 4% SWR are in our favor and I feel confident in starting there. In other words - 4% works until it doesn't work. Like everything else in life you adjust. No big deal.
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Old 01-28-2008, 08:03 AM   #58
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Reality - You withdraw at 4%. If the market has a series of bad years and you see your stash get smaller - you adjust downward. (wouldn't everybody)

If you don't have a plan to downsize if necessary then you don't really have a plan. If you can't downsize then you didn't start with enough money.

The odds of a 4% SWR are in our favor and I feel confident in starting there. In other words - 4% works until it doesn't work. Like everything else in life you adjust. No big deal.
I couldn't agree more. I think that it is difficult to truly understand that past performance of the market does not guarantee the future, and to realize that consequently one might have to downsize in a bear market of unprecedented length. So naturally, people want to "pull the trigger" as soon as 4% will give them the lifestyle they demand or need. Really, they will probably be fine but life has its way of surprising us sometimes.

The simplicity of computing 4% withdrawal every year is appealing. The possible problems arise from the assumptions, not the computations.

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I'm not sure what to make of some of the comments about 'ultra-safe' investments. In an inflationary environment, would 'ultra-safe' (fixed?) investments help, or hurt? Seems we would need a crystal ball to know what is 'ultra-safe', right?
We do the best we can to identify "ultra-safe". But I think this brings up a good point. Again, life has its way of surprising us sometimes. I will be putting my "ultra-safe" money in four different ultra-safe places (bonds, money market, G Fund (guaranteed treasury fund), and savings account), but even then who knows what the future could bring? Hopefully if one turns out not to be so safe, another might be safe. All we can do is the best that we can do, and then hope like crazy and hang on for the ride.

By the way, thanks for the idea of putting a higher "lowest amount of portfolio" into Firecalc. I feel a lot better having checked that.
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Old 01-28-2008, 08:51 AM   #59
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Where to start? Well, how about with something pro-active? I agree with the posts that state that we would cut our spending when the portfolio goes down significantly. But when/how? Since we can't predict the future, we wouldn't know if a 30% decline was a blip that we could safely ignore, or the start of a protracted downturn. So we would need to mechanically 'just do it'. It would be interesting to see an algorithm like that in FireCalc, but there are a million ways to do it. I wonder how much a 'soft adjustment' would help?

-ERD50
FireCalc DOES implement spending rules on the tab sheet of that same name. The options are constant spending power, the Bernicke approach, and percentage of remaining portfolio including the 95% rule approach. It is also possible to implement one time variations in spending.
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Old 01-28-2008, 09:17 AM   #60
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I'm picturing something like: Don't increase your inflation adjusted SWR when your net worth rises, but if it dips below that support level, cut your spending by half that deficit. Less drastic than a one-for-one cut. I wonder how much that would cushion the dips?

Example: If your SWR was 4.0% of a $1M portfolio, and your inflation adjusted portfolio dropped to $800,000 (a 20% drop), drop your spending to an inflation adjusted 3.6% (a 10% drop in spending).

Or an ~ 2% SWR as HaHa states, would limit the dips to 50%.
What I have had in the back of my mind, is to examine the portfolio's value each year and compare with a yearly target amount which I will define as the portfolio's beginning value plus inflation.

If my portfolio value is equal to or greater than the target amount, then I would withdraw as much as I need and want of the excess over the target amount, up to 4%.

If the portfolio value is below the target amount, I would cut back to 1% plus my tiny pension check. (Until I start receiving SS in 2014, I would cut back to 2% instead of 1% if necessary.)

This ought to work really well, and with only 45% equities I wouldn't expect the portfolio to fall below the target much at all, if ever, after the first few years.
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