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Old 02-01-2008, 05:40 PM   #81
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Didn't ESRBob cover this with his 95% rule? Basically you adjust the 4% by only taking 95% of what you took last year if it is a down year - it allowed for a graceful reduction.
I just did a few quick runs of that, I'll try to organize and post later.

Is there a data output? It's kind of tough to scan the squiggly line output for specifics, but at a glance, it looked like spending got cut in half for many years, and there was still a deep dive. It's probably the right thing to do, and probably what most of us would choose to do, but it may not help as much as we think.

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Old 02-01-2008, 05:55 PM   #82
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BTW, I can sleep 5 adults and a couple of small kids. More if they want to sleep on the floor but the dogs might object.

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Old 02-02-2008, 07:03 AM   #83
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To those of you with generous pensions, oversized portfolios supporting low WR's or both, congratulations! You'll probably won't have the opportunity to see the ground rushing up at you as you free fall through economic downturns. But to those who have little ongoing income and are counting on a full 4% WR to support your desired lifestyle, my hat is off to you. You're really walking the talk!
I wonder about the people that claim they are living on some extemely small % as the "SWR." That tells me they are either depriving themselves of a more enjoyable lifestyle or they waited way too long to ER (or both).
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Old 02-02-2008, 07:11 AM   #84
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I wonder about the people that claim they are living on some extemely small % as the "SWR." That tells me they are either depriving themselves of a more enjoyable lifestyle or they waited way too long to ER (or both).
Maybe they are just being more cautious than others. Some may think that an SWR of 2% is too cautious, and that they are depriving themselves, but remember that SWR's around 4% were derived by using past market history, which is not necessarily predictive of the future. Often the unexpected happens and preparing for it isn't necessarily a bad thing, though it may seem overly cautious. Take, for example, the housing market.

When I bought my home with a 30 year fixed in 2002, lots of people would have said I was depriving myself of a bigger, more enjoyable home by not doing some creative financing with ARM's, or getting that extra quarter of a percent lower mortgage by going with a fly by night. I thought a 30 year fixed with a solid bank that had a long history was safer, though, and now I'm glad I went that way. It's all a matter of viewpoint.
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Old 02-02-2008, 08:10 AM   #85
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I thought a 30 year fixed with a solid bank that had a long history was safer, though, and now I'm glad I went that way. It's all a matter of viewpoint.
30 year fixed at a good rate is always smart but what does the lender matter? They all sell the mortgages anyway. And if your lender goes belly up no one can call your loan can they?
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Old 02-02-2008, 08:43 AM   #86
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I wonder about the people that claim they are living on some extemely small % as the "SWR." That tells me they are either depriving themselves of a more enjoyable lifestyle or they waited way too long to ER (or both).
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Maybe they are just being more cautious than others. Some may think that an SWR of 2% is too cautious, and that they are depriving themselves,

.... Often the unexpected happens and preparing for it isn't necessarily a bad thing, though it may seem overly cautious.

.... It's all a matter of viewpoint.
Exactly, W2R. I could view a 4% withdraw rate as 'depriving' a retiree of security. Seeing almost 3/4 of my portfolio go 'poof' in just 15 years is just not something that I could be comfortable with.

I would be sleep deprived!

If my portfolio was down to 1/4 of its original buying power, I might get scared and decide at that point that I better cut spending to 1/4 of it's original! Now THAT would be deprivation. I'd rather take a more conservative stance at the start - the odds are good that your account will grow faster than inflation. Then you can rerun FireCalc with a now shorter timeframe and larger portfolio, and determine a new, higher SWR.

You would have rather spent the money in the first ten years of retirement? Sure, and I would have rather spent it in my teens. Life is full of compromises.


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The concept is pretty obvious if you stare at the FireCalc results in detail. A 4% SWR is hyper conservative unless you retire right in front of a major market downdraft (ala 1929) or a longterm flat market ( ala 1968 ) that goes on for a decade or more. If you could somehow "know" you have ten years for retirement before a major market downturn, your portfolio would grow so high that you could take the big hit and not run out of money.
I disagree - I don't think you are analyzing the FireCalc runs correctly, but I'll answer after I get some breakfast....

-ERD50

Heck, I'm not trying to tell anyone what to do. But I am trying to make them aware that with a 4% withdraw rate, history says you could be down to about 1/4 of your portfolio in just 15 years. As W2R (and others ) said, there is no reason to think the future could not be worse. Especially our own personal futures.

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Old 02-02-2008, 10:00 AM   #87
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Actually, I think we've finally outed CFB -- he is Scott Adams!

I'm in for a spot in the campground. Who's collecting the 30k?

Seriously (or unseriously), while markets are going up, we're all growing our confidence in ER based on the financial possibilities. I think the discipline now is that if markets go down, we don't get panicky-obsessed about the money side of ER. Instead we need to start thinking about the whole bigger purpose of this path -- it is about Freedom, about Living Life, about Discovering. If the money gets tight, then find a cheaper way to live! Some of the most uptight and unhappy people I know are the ones with the most money.

Sure a certain amount of money/savings is essential to ER, but if we're looking at today's stock market to figure out if we can ER or not, or whether the path is viable, I think that misses the point. The point is to hope for the best, but be prepared to make trade-offs if the finances run against you for a sustained period, and at every turn, keep focussed on the benefits of having your life back, your time, your freedom to fully access all this life has to offer. ER is like getting out of prison. Let's not recreate a new prison called 'financial anxiety'.
I'm with you on this, Bob. If ER means being in a constant state of worry, maybe we should just forget about it.

Regardless of your religious leanings, Jesus' words on worry bear repeating "So do not worry about tomorrow, for tomorrow will bring worries of its own. Today's trouble is enough for today" (Matthew 6:34)(As an aside, I really like the King James version of the last sentence -- "Sufficient unto the day is the evil thereof".) Another, more secular saying is the old military dictum that "No battle plan survives first contact with the enemy."

All we can do is plan as well as we can and adapt to the inevitable changes that will come our way. While a certain amount of caution is commendable, fear of an unknown future should not prevent us from living our lives today.
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Old 02-02-2008, 10:13 AM   #88
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People seem to be taking on my comment about a hyper-conservative 2% SWR pretty hard. I intend to start out with a 4% SWR (factoring in future SS) but my lifestyle plan includes a substantial amount of discretionary spending for travel that I can eliminate or reduce if faced with a seriously declining portfolio. I also believe that the "Bernicke Factor" will kick in and I won't want to travel as much as I age. My FIRECalc runs also assume a significant minimum portfolio value which will be my longterm care fund. I know that when I'm in the nursing home that will become my only expense.

I am not planning on a full Bernicke plan which would significantly increase my early spending. Doing that would significantly reduce my ability to absorb a portfolio hit.

I would agree 2% is "reasonable" if someone was just barely surviving on that amount with little discretionary spending. If I went with my low budget plan, I currently have 50% more in my portfolio than I "need" for my living expenses. As it is, my actual 95% "success historically proven" budget is 50% above my minimum (but still nice) cost of living. Lots of travel is the only difference. That's easy to cut out if necessary.

I don't intend to live in fear of running out of money or tommorrow's market weakness. I will be willing to adjust my lifestyle as necessary.
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Old 02-02-2008, 10:32 AM   #89
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Actually, I think we've finally outed CFB -- he is Scott Adams!

I'm in for a spot in the campground. Who's collecting the 30k?

Seriously (or unseriously), while markets are going up, we're all growing our confidence in ER based on the financial possibilities. I think the discipline now is that if markets go down, we don't get panicky-obsessed about the money side of ER. Instead we need to start thinking about the whole bigger purpose of this path -- it is about Freedom, about Living Life, about Discovering. If the money gets tight, then find a cheaper way to live! Some of the most uptight and unhappy people I know are the ones with the most money.

Sure a certain amount of money/savings is essential to ER, but if we're looking at today's stock market to figure out if we can ER or not, or whether the path is viable, I think that misses the point. The point is to hope for the best, but be prepared to make trade-offs if the finances run against you for a sustained period, and at every turn, keep focussed on the benefits of having your life back, your time, your freedom to fully access all this life has to offer. ER is like getting out of prison. Let's not recreate a new prison called 'financial anxiety'.
Bob I think your post was brilliant and apropos to the current discussion. It seems to me that on this forum sometimes people get so wrapped up in worrying about dire financial outcomes, that they miss the whole point of ER.

There simply isn't 100% financial security. No one knows what the future will bring, or whether or not you will even be alive to enjoy or suffer it!

ER takes a leap of faith. But sometimes we forget that what we are leaping from isn't guaranteed either - all sorts of bad things can happen no matter which life stage. I think it's key to trust ourselves to be flexible and creative when retired, and focus on enjoying life and NOT spend too much time worrying about worst case financial scenarios. Having plenty of padding in the budget and total assets is important. But at some point, enough is enough.

You mustn't sacrifice too much of your quality of life today for some imagined outcome in the future. Balance is essential.

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Old 02-02-2008, 10:39 AM   #90
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I'm with you on this, Bob. If ER means being in a constant state of worry, maybe we should just forget about it.
...

All we can do is plan as well as we can and adapt to the inevitable changes that will come our way. While a certain amount of caution is commendable, fear of an unknown future should not prevent us from living our lives today.
I think you are missing the point. No, I'll re-phrase that - you ARE missing the point. It is not fear of an unknown future, but the reality of a known past.

FireCalc shows that a 4% withdraw rate can leave you with just 27% of your portfolio after just 15 years. How would you 'adapt' to that?

For some, realizing this issue and planning for it with a conservative SWR may be exactly what is needed to avoid a 'constant state of worry'. No reason to forget about ER, but one should know what the past has held for people. That is what FireCalc is all about.

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Old 02-02-2008, 10:54 AM   #91
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As others have said, you would not wait until you have lost 73% of your money before taking action.

But aside from that, one thing I know with certainty is that I will never have enough money to guarantee that I won't run out. Depending on the length of your retirement, the monte carlo simulation in Firecalc covers roughly 100 periods. Yet there are actually an infinite number of possible courses the financial markets can follow starting from any point in time. Firecalc may well say you have a 100% success rate, but that would not guarantee it. The future may be better or it may be worse; it may be the similar to the past or not. We simply can't know.

It may well be that using a 2% withdrawal rate will be just the comfort some people need, and therefore, they should do that But no one should be under any illusion that even a 2% withdrawal rate guarantees anything.
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Old 02-02-2008, 10:59 AM   #92
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People seem to be taking on my comment about a hyper-conservative 2% SWR pretty hard. I intend to start out with a 4% SWR (factoring in future SS) but my lifestyle plan includes a substantial amount of discretionary spending ....

I would agree 2% is "reasonable" if someone was just barely surviving on that amount with little discretionary spending. ....

I will be willing to adjust my lifestyle as necessary.
2B, that does add a lot of balance to your statement. It makes perfect sense to me in that context. From my perspective, I've always lived fairly LBYM, so there is not a lot of my spending that I would want to consider discretionary. I'm sure I could if I had to, but that is my point - for me a lower SWR is more comfortable and less worry than having to consider big cuts in spending.

As far as cutting spending to adjust - try the runs in FireCalc and see if those numbers are ones you would be comfortable with. And as youbet stated, for someone with a large % of expense covered by COLA pensions and.or SS, it is less of an issue. If half your spend is covered by pension/SS, then cutting your portfolio withdraws in half only cuts your spending by 25%.

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There simply isn't 100% financial security. No one knows what the future will bring, or whether or not you will even be alive to enjoy or suffer it!

ER takes a leap of faith. But sometimes we forget that what we are leaping from isn't guaranteed either - all sorts of bad things can happen no matter which life stage.
Audrey
Audrey, once agian - I am not talking about 'what the future may bring', but what the past has brought!

You are 100% correct - nothing is guaranteed. My viewpoint is, since so little is guaranteed, I want to at least have some assurance that my portfolio won't drop in half. So, if other bad things happen, at least I won't have that worry on top of it.

What seems 'prudent' to some, seems like 'needless worry' to others. As I said before, find your own comfort level, but I will recommend that you run FireCalc and look at those portfolio dips (NOT just the end balance), and decide if that is really something you could be comfortable with.

-ERD50
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Old 02-02-2008, 11:11 AM   #93
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As others have said, you would not wait until you have lost 73% of your money before taking action.
Well, do some FireCalc runs, and see just how much some earlier cutting helps. It helped less than I imagined, but I have some more homework to do there. And you need to start early - so you may very well cut your spending after a couple down years only to find they were followed by three great years, and there was no need to cut.

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But no one should be under any illusion that even a 2% withdrawal rate guarantees anything.
Minor point, but FireCalc is not Monte Carlo, it uses actual data - not randomized.

A 2% withdraw rate does guarantee something - that you will be in a better financial position than if you used a 4% or 3% withdraw rate. If we see some repeats of the bad years or worse, that may be a very important distinction.

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Old 02-02-2008, 11:22 AM   #94
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For some, realizing this issue and planning for it with a conservative SWR may be exactly what is needed to avoid a 'constant state of worry'. No reason to forget about ER, but one should know what the past has held for people. That is what FireCalc is all about.
I agree and will add a little data to illustrate. Using FireCalc I determined that the average drawdown (lowest level portfolio reached before rebounding) was 28%. The worst drawdown was 62% in the 1966 to 1982 period. Note this is with my SWR and social security and etc.

So if, for example, I had a $1,000,000 portfolio the average worst case situation I should expect to experience is a portfolio of $720,000. The absolute worst case portfolio situation would have left me with $380,000 before rising again.

I think that I should be mentally prepared for at least the average worst case situation. But it will still be an uncomfortable situation.

BTW, looking at FireCalc version 3 you can kind of eyeball drawdowns by looking for the lowest level some of those squiggally lines reach in the results chart.
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Old 02-02-2008, 11:38 AM   #95
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I don't think the solution to all of this angst has been mentioned yet: annuities!

Some people seem to have pension envy. Annuities!

The real reason we're all sticking with stocks and bonds is greed, right? We're basically betting that worst-case won't really happen to us.
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Old 02-02-2008, 11:39 AM   #96
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What seems 'prudent' to some, seems like 'needless worry' to others. As I said before, find your own comfort level, but I will recommend that you run FireCalc and look at those portfolio dips (NOT just the end balance), and decide if that is really something you could be comfortable with.
I really do share your concerns over people's interpretation of FireCalc results. It's been my observation that since FireCalc gives it's output in terms of success or failure, many individuals have been drawing the conclusion that success means your portfolio retaining or growing it's value, in real terms, throughout your retirement. Actually, FireCalc clearly states success = any non zero or positive outcome and observation of the output of my FireCalc runs shows plenty of "close calls."

It's something you just have to understand and accept. A WR that, when tested historically, results in a 100% probability of portfolio survival may incur significant real losses over the withdrawal period and even approach zero at the end. But, it doesn't cross the zero line and that means 100% success!

If low portfolio values disturb you, use the FireCalc option to call out a minumum portfolio value defining failure. You'll need a larger portfolio to support your desired WR, but you won't have to stomach scary dips below that amount.

Finally...... While reducing your WR to some level less than FireCalc's SWR will slow portfolio erosion during tough times (I think you folks are referring to this as reducing spending), the real answer to avoiding dips is to assume an AA with a lower beta in the beginning. This also requires a larger portfolio, more w**k and less RE time.

It's a tradeoff. The inability to stomach portfolio value swings during the withdrawal phase = needing a more conservative approach (larger portfolio supporting a lower WR or more conservative AA). A more conservative approach = working more.
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Old 02-02-2008, 11:45 AM   #97
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A 2% withdraw rate does guarantee something - that you will be in a better financial position than if you used a 4% or 3% withdraw rate. If we see some repeats of the bad years or worse, that may be a very important distinction.
-ERD50
No doubt that you will be better off in a lower withdrawal rate scenario. Yet one other thing that using 2% versus 4% guarantees is that you will need to continue working long enough to double your starting portfolio amount. Depending on the ratio of current contributions to internal portfolio growth and overall portfolio performance, that could mean 5 - 10 years of additional work. You have to weigh these lost years of your life against the need to feel more secure.
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Old 02-02-2008, 11:51 AM   #98
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So if, for example, I had a $1,000,000 portfolio the average worst case situation I should expect to experience is a portfolio of $720,000. The absolute worst case portfolio situation would have left me with $380,000 before rising again.

I think that I should be mentally prepared for at least the average worst case situation. But it will still be an uncomfortable situation.
Actually, having an average outcome of $720k will not be highly probable. More likely, you'll have some higher or lower number. If I were you, I wouldn't be preparing myself to accept the average, rather I'd be preparing myself to accept less than average, even the worse case $380k.

Remember, because the distribution of outcomes is widely disbursed (relatively flat distribution) the probability of achieving approximately average results is little more than the probability of achieving any other result, higher or lower than average.
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Old 02-02-2008, 12:08 PM   #99
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I don't think the solution to all of this angst has been mentioned yet: annuities!

Some people seem to have pension envy. Annuities!

The real reason we're all sticking with stocks and bonds is greed, right? We're basically betting that worst-case won't really happen to us.
Personally, I'm no fan of annuities. Wild swings in portfolio value over the withdrawal phase help keep my "edge." However, you're correct. A low cost annunity replacing some percentage of your portfolio will dampen total portfolio value swings at the expense of guaranteeing a lower terminal amount. Depending on your personality and life circumstances, could be a wise choice.
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Old 02-02-2008, 12:25 PM   #100
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It's a tradeoff. The inability to stomach portfolio value swings during the withdrawal phase = needing a more conservative approach (larger portfolio supporting a lower WR or more conservative AA). A more conservative approach = working more.
Yes, but a little caveat is in order. Tilting the AA too far towards fixed income starts to bring lower lows too - I'd assume due to high inflation periods.

Once you decide on some other factors, you can start running FireCalc with various AA and look for a range of historically optimum ratios. 50/50 looked pretty good for my case, but it was not a huge delta from 75/25.

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... that could mean 5 - 10 years of additional work. You have to weigh these lost years of your life against the need to feel more secure.
Yep, that is what it all comes down to. Certainly a personal decision. But I wonder how many people here, if faced with a dwindling portfolio, would do the 'coulda-shoulda-woulda' and think to themselves 'gee, I coulda gutted out another 5 years at work, was it really that bad?'.

For me, I'm retired for 4 years now, and have been all smiles - but my portfolio has grown and I have not touched pension or SS yet, so it's easy. Take away 2/3 of my portfolio (that hurts even to type it!), picture a sit-down with DW about cutting spending (you go first, she would say!), and I think I would be questioning my actions.

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...rather I'd be preparing myself to accept less than average, even the worse case $380k.

Remember, because the distribution of outcomes is widely disbursed (relatively flat distribution) the probability of achieving approximately average results is little more than the probability of achieving any other result, higher or lower than average.
Absolutely - and there is a bit of a bright side to this as well. It does look like a relatively even distribution of outcomes, so I could say that there is a 75% chance that my dips will be fairly modest, something that I can take in stride. Couple that with SS and pension (non-COLA ), and the odds are decent that we will not experience the really bad cases. But I can't just shrug off a 25% chance, and I do feel it is prudent to at least think it through and develop a plan.

-ERD50
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