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Re: Greater than 4% Withdrawal Rate
Old 01-17-2007, 03:49 PM   #21
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Re: Greater than 4% Withdrawal Rate

There are scenarios which turn the 4% rule on it's head ... like those who live off rents/dividends.

Doing taxes 06, the rentals are currently throwing off 4.5 - 5% of current market value. This is DOWN from previous years because of ridiculous property values. Previous years I'ld see 6-8%.

Now if I am living off these rents/dividends, most would agree I have a 4.5-5% SWR. And I can do this "forever" since rents are inflation adjusted (as would be dividends). Add SS and pitance of the severence in 20 years and my SWR goes even higher. All the while NEVER depleteing pricipal ... in fact I could croak and leave enough of a wad to my kids, in say 50 years, that they can repeat this indefinatley.

Note the Noregian widow has the same "problem".

So who cares about 4%?!?
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Re: Greater than 4% Withdrawal Rate
Old 01-17-2007, 03:58 PM   #22
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Re: Greater than 4% Withdrawal Rate

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Originally Posted by tryan
There are scenarios which turn the 4% rule on it's head ... like those who live off rents/dividends.
This is also my POV. I think real estate is excellent for this, but so are other traded securities which may allow more diversification and are definitely easier to manage. I know there are those who manage properties in Atlanta, say, from a far off home, but I couldn't imagine doing it.

If there is a knock on this approach, it is diversification. To me this negative is trumped by a higher yield and usually less volatility.

Ha
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Re: Greater than 4% Withdrawal Rate
Old 01-17-2007, 06:02 PM   #23
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Re: Greater than 4% Withdrawal Rate

A 60/40 portfolio consisting of the S&P 500 and the Total Bond Index yields about 3%. So with a 4% withdrawal you're only pulling out 1% of your principal (2% including the inflation premium on your bonds). That seems pretty reasonable if you're talking about a 30 year retirement period.

For longer periods FIRECalc says you need something closer to 3% which more closely approximates current yields.
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Re: Greater than 4% Withdrawal Rate
Old 01-17-2007, 06:23 PM   #24
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Re: Greater than 4% Withdrawal Rate

Quote:
Originally Posted by HaHa
I believe this also. It is data-mining at its most blatant. And the reason for doing it is clear. This FP/Author greatly enhances his own professional stature and earning ability by publishing a popular but fallacious "journal article".

Is he worried that he may be wrong? Of course not, it is a sales piece, and likely a successful one.

Will he suffer if he turns out to be wrong? Unlikely- as long as the world doesn't fall apart tomorrow, whatever damage there may be won't fall on him.

As LeRouchefoucauld said, "The mind is always the dupe of the heart".

Ha

Wow, pretty harsh. Carry a grudge much?

At least you are consistent: Seems your bias has not changed since around 2003:

"a 4% SWR, which IMO is generous to foolhardy"


If the other methods are bogus, what do you think a 'safe' SWR for planning purposes is, and on what method would you base the estimate?

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Re: Greater than 4% Withdrawal Rate
Old 01-17-2007, 06:26 PM   #25
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Re: Greater than 4% Withdrawal Rate

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Originally Posted by 3 Yrs to Go
A 60/40 portfolio consisting of the S&P 500 and the Total Bond Index yields about 3%. So with a 4% withdrawal you're only pulling out 1% of your principal (2% including the inflation premium on your bonds). That seems pretty reasonable if you're talking about a 30 year retirement period.

For longer periods FIRECalc says you need something closer to 3% which more closely approximates current yields.
Why so low? A balanced fund such as Wellington with a 60/40 have returned 8.5% since its inception That is about 5% over inflation.
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Re: Greater than 4% Withdrawal Rate
Old 01-17-2007, 06:31 PM   #26
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Re: Greater than 4% Withdrawal Rate

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Why so low? A balanced fund such as Wellington with a 60/40 have returned 8.5% since its inception That is about 5% over inflation.
You're quoting Wellington's total return, which includes capital appreciation. My comment referred to yield, which excludes capital appreciation.
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Re: Greater than 4% Withdrawal Rate
Old 01-17-2007, 06:40 PM   #27
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Re: Greater than 4% Withdrawal Rate

I confess, I have that bias. Most people wouldn't call a clearly stated negative opinion on a publication "a grudge". Guyton is a public figure, creating publications for the pubic to read. If someone wants to critique it, including me, I can't see why he shouldn't. If this is a grudge, you must have lived in a very protected environment.

BTW, if you read the article you would see that he is not talking about a 4% SWR, but a way of arriving at something higher.

As for as what I would suggest, I have never made any suggestions, but I have made many observations right and wrong. They are all here. I don't advocate anything for anyone. I make choices for my own investing; I am overjoyed that I have no responsibility for anyone else.

I am dispassionate about what others do because I wouldn't want anyone to modify their preferences on account of anything that I say. It might well be and in fact frequently will be wrong.

Ha
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Re: Greater than 4% Withdrawal Rate
Old 01-17-2007, 08:02 PM   #28
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Re: Greater than 4% Withdrawal Rate

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Originally Posted by HaHa
I confess, I have that bias. Most people wouldn't call a clearly stated negative opinion on a publication "a grudge". Guyton is a public figure, creating publications for the pubic to read. If someone wants to critique it, including me, I can't see why he shouldn't. If this is a grudge, you must have lived in a very protected environment.

BTW, if you read the article you would see that he is not talking about a 4% SWR, but a way of arriving at something higher.

As for as what I would suggest, I have never made any suggestions, but I have made many observations right and wrong. They are all here. I don't advocate anything for anyone. I make choices for my own investing; I am overjoyed that I have no responsibility for anyone else.

I am dispassionate about what others do because I wouldn't want anyone to modify their preferences on account of anything that I say. It might well be and in fact frequently will be wrong.

Ha
Thanks for the feedback. I gladly retract my disparaging term "grudge". And I agree that he is both open to critique, and that he is trying to come up with maximal SWR (and attract readers), not working from some 4% gold standard. As someone who is fretting a bit over how to really be assured I will have enough if I pull the trigger soon, I am lapping up the various historical methods, theories, calculators, etc, in order to try to get the best 'feel' for what can be sustained, so forgive my eagerness/rudeness. I am, however, still very much interested in how you (or others) determine what rate of withdrawal they feel can be sustained. If your own posts have covered that, I am not going to ask that you restate it here - I know this topic has gotten a lot of heated play long before my own very recent interest, so some are justifiably weary of the topic.

Cheers!
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Re: Greater than 4% Withdrawal Rate
Old 01-17-2007, 08:29 PM   #29
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Re: Greater than 4% Withdrawal Rate

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Originally Posted by DRiP Guy
As someone who is fretting a bit over how to really be assured I will have enough if I pull the trigger soon, I am lapping up the various historical methods, theories, calculators, etc, in order to try to get the best 'feel' for what can be sustained, so forgive my eagerness/rudeness.
I know where you are coming from and I feel your pain, but gotta tell you that after more than a year of studying and reading this stuff here and elsewhere, you probably won't get much closer to the rainbow than you are now.

4% is a sound, conservative figure and works well as a planning tool. In the real world, my sense is that people scatter their decisions around that figure, but flex both their expenses and income generously. If you are getting ahead after a few years, you bump it up. The opposite occurs, you tighten your belt. But the 4% SWR (or its cousin, the 20-25x annual expense as a savings goal) are rules of thumb worth being aware of.

You may be overthinking this. I know I did, but now I am glad to have it as a benchmark, a sanity check.
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Re: Greater than 4% Withdrawal Rate
Old 01-17-2007, 08:39 PM   #30
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Re: Greater than 4% Withdrawal Rate

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Originally Posted by Rich_in_Tampa


4% is a sound, conservative figure and works well as a planning tool.

You may be overthinking this. I know I did, but now I am glad to have it as a benchmark, a sanity check.
Thanks!
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Re: Greater than 4% Withdrawal Rate
Old 01-17-2007, 09:01 PM   #31
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Re: Greater than 4% Withdrawal Rate

I have come to accept from everything I have seen to plan on a 4% withdrawl rate. If you begin ER with a 1 million dollar portfolio - earn 15% - lets say it was a very good year and spent 40,000 your balance would now be $1,110,000.00 It would appear to me you could recalculate your starting point and now take out $44,400 in year 2 and increase for inflation for time immortal and still have the same implied safety rate you did at the begining when you took out $40,000. Only now it would be equivalent to a 4.3% withdrawl rate or so of your original plan.

What I am saying is that your original withdrawl of 4% for inflation may have a 95% or better chance of success but the immediate change in your portfolio in year one automatically will change your success or failure rate.

Likewise if you wanted to risk 5% you could take the 50,000 out the first year and recalculate your risk at the end of the year. However a portfolio loss of 15% would reduce your portfolio to $800,000 and now a 95% safety rate is only $32,000.00 and would require a cut in expenditure of 36% versus 16% if you were planning on the 4% withdrawl. These early down years would be a killer if you were actually counting on more than 4% if the portfolio heads up via historical standards 5% will be OK. It just does not seem prudent mathmatically to me.
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Re: Greater than 4% Withdrawal Rate
Old 01-17-2007, 09:26 PM   #32
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Re: Greater than 4% Withdrawal Rate

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Originally Posted by Running_Man
I have come to accept from everything I have seen to plan on a 4% withdrawl rate. If you begin ER with a 1 million dollar portfolio - earn 15% - lets say it was a very good year and spent 40,000 your balance would now be $1,110,000.00 It would appear to me you could recalculate your starting point and now take out $44,400 in year 2 and increase for inflation for time immortal and still have the same implied safety rate you did at the begining when you took out $40,000.
That's fine, but to retain your success rate long term, you'd also need to decrease your withdrawals to 4% of a lower denominator when the market is down. If you just cherry pick the up years to reset your thermostat, you will lower your success rate.

So, back to basics: 4% adjusted by inflation forever, or 4% in good years and bad. Refinements such as ESRBobs 95% rule can be added, and at least for me, 4.25% seems a good number for an acceptable if slightly greater risk of failure.
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Re: Greater than 4% Withdrawal Rate
Old 01-17-2007, 09:39 PM   #33
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Re: Greater than 4% Withdrawal Rate

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Originally Posted by Rich_in_Tampa
That's fine, but to retain your success rate long term, you'd also need to decrease your withdrawals to 4% of a lower denominator when the market is down. If you just cherry pick the up years to reset your thermostat, you will lower your success rate.
Why? Your portfolio doesn't know which year you actually retired. If you are relying on FIRECALC, it seems to me that you could take 4% (or whatever success rate you choose to get the confidence level you want) and base it upon the highest value the portfolio obtained during your retiirement.
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Re: Greater than 4% Withdrawal Rate
Old 01-17-2007, 09:53 PM   #34
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Re: Greater than 4% Withdrawal Rate

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Why? Your portfolio doesn't know which year you actually retired.
I believe there is an averaging effect at play. Year one's 4% +- inflation in future years will be under 4% of total assets some years and higher in other years. The point of the analysis is that through good years and bad, that number yields a high success rate overall.

If you simply escalate your withdrawal rate every time investments are up, and fail to balance that with lower withdrawals when they are down, the model doesn't apply. Think about what might happen if you reset upward when stocks are up 15% to $1,015,000; next year they are down 10% to $913,500 but you are still withdrawing 4% of the higher 15% increased balance or $40,600 -- that's a 4.4% withdrawal during the down year. It gets worse if you have a great year (reset the number) followed by a few down years while you still use the good year's withdrawal rate.

I think you might be able to reset it every 5 years or so if things have grown nicely, but I would not do so indiscriminately, and I'd be prepared to lower it if you hit a bad stretch - beginning to approach the fixed "percent of assets" system if you go that route.

At least that's my understanding. Maybe Dory can set me straight if I am incorrect.
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Re: Greater than 4% Withdrawal Rate
Old 01-17-2007, 10:09 PM   #35
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Re: Greater than 4% Withdrawal Rate

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Originally Posted by Rich_in_Tampa
I believe there is an averaging effect at play. Year one's 4% +- inflation in future years will be under 4% of total assets some years and higher in other years. The point of the analysis is that through good years and bad, that number yields a high success rate overall.

If you simply escalate your withdrawal rate every time investments are up, and fail to balance that with lower withdrawals when they are down, the model doesn't apply. Think about what might happen if you reset upward when stocks are up 15% to $1,015,000; next year they are down 10% to $913,500 but you are still withdrawing 4% of the higher 15% increased balance or $40,600 -- that's a 4.4% withdrawal during the down year. It gets worse if you have a great year (reset the number) followed by a few down years while you still use the good year's withdrawal rate.

I think you might be able to reset it every 5 years or so if things have grown nicely, but I would not do so indiscriminately, and I'd be prepared to lower it if you hit a bad stretch - beginning to approach the fixed "percent of assets" system if you go that route.

At least that's my understanding. Maybe Dory can set me straight if I am incorrect.
Suppose I ER'd at the end of 2002. Over the past 4 years my portfolio is up 50% and is today equal to your portfolio in value. You run FIRECALC and decide to ER today with a 4% SWR. Why shouldn't we both go forward with the same dollar withdrawal if we believe 4% is the "right" SWR, since our portfolios are equal in value today?
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Re: Greater than 4% Withdrawal Rate
Old 01-17-2007, 10:17 PM   #36
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Re: Greater than 4% Withdrawal Rate

Rich, FIRED, check out this post from Dory on the "Best of..." board. I think it will answer your questions:

http://early-retirement.org/forums/i...99243#msg99243

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Re: Greater than 4% Withdrawal Rate
Old 01-17-2007, 10:22 PM   #37
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Re: Greater than 4% Withdrawal Rate

Rich,
I think you're right. You could probably reset in 5 years, but you can't cherry-pick the good years since those years of under-withdrawing are needed to support the inflation-adjusting in the bad years, too, as I understand the model.

By switching to the 'withdraw a percent of portfolio value each year' approach, you're essentially resetting every year, and in exchange letting the inflation-adjustment piece go away. I just was never comfortable with the machinery of that set-and-inflate method, or with the previous poster's valid question about resetting yourself to Year 1 after a good year etc. That is what led me to this other approach, which, btw, is generally used by foundations making grants who want to keep making them in perpetuity (which is where the theoretical and empirical foundations for the approach come from). Turns out the annual re-setting of distributions does very good things for portfolio survivability, too (measured in terms of real portfolio value). Soften the downturns with a low-volatility portfolio, some part-time income and the 95% Rule and you've got something which should work well for ERs over the several-decade time frames we need these things to work for.

The other nice thing about this approach is, should you want or need to spend additional sums one year, just do it. The next year, your new safe withdrawal is just 4% +/- of that new lower portfolio value. You don't have to worry about stashing the money aside, pretending you didn't really spend it, paying it back to the portfolio or anything. It's very easy and straightforward to cheat and forgive -- you aren't borrowing from the future or endangering your model, since the model is fresh every year with a new safe withdrawal amount based on a new portfolio value, and a historically supported promise of sustaining that in real terms into the future (since we all need to know we can count on these withdrawals going forward to support a target lifestyle).

In that way it's both flexible and self-policing, which somehow appeals to me.
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Re: Greater than 4% Withdrawal Rate
Old 01-18-2007, 01:11 AM   #38
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Re: Greater than 4% Withdrawal Rate

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Rich,
I think you're right. You could probably reset in 5 years, but you can't cherry-pick the good years since those years of under-withdrawing are needed to support the inflation-adjusting in the bad years, too, as I understand the model.

. . .
Well. . . No. The 4% rule is based on a worst case analysis of history along with an assumption that the future will never be worse than the worst case in the past.

If the assumption is true, then you can always adjust upward if the market is good to you. The calculation does not require good years needing to support future bad years.

On the other hand, there are plenty of other marginal assumptions. Do any of you know exactly when you are going to die? The 4% rule is based on 30 year retirements. Assume for a minute that you know you will die in 30 years. If after year 1 in retirement, your portfolio is worth more (after inflation) than in year 0, you could run FIRECalc with a 29 year retirement interval and come up with a higher SWR. This is a legitimate application of FIRECalc provide you believe the underlying assumption and know that your are really going to die 30 years from your initial run. If the market is down in your first year, the FIRECalc comuptation gives you a lower SWR, but you can ignore it if you believe that the future will not be worse than the past.

But what if you live 35 more years? What if some of your investments are in something other than S&P500 and bond index funds? What if your expense ratio is greater than 0.18%? What if your personal inflation rate is greater than CPI?

There are plenty of reasons to be conservative about increasing your SWR.

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Re: Greater than 4% Withdrawal Rate
Old 01-18-2007, 07:31 AM   #39
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Re: Greater than 4% Withdrawal Rate

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Suppose I ER'd at the end of 2002. Over the past 4 years my portfolio is up 50% and is today equal to your portfolio in value. You run FIRECALC and decide to ER today with a 4% SWR. Why shouldn't we both go forward with the same dollar withdrawal if we believe 4% is the "right" SWR, since our portfolios are equal in value today?
This aspect of the concept is what always troubles me. I understand running a 4% solution against all historical precedents to get an historical failure rate based on AA and withdrawal. That is a prediction based on a point in time (today). If the predictive model is valid it should not be necessary to second guess yourself in year 2 if the market goes down - say 10%. You have already calculated that even in periods of initial bear market you have X% chance of failure. By that reasoning, If I calculate my 4% SWR in 2006 but don't actually need to withdraw any money until a year later. I could pull both the 2006 4% plus the 2007 4.03% (total 8.03% of initial value) in 2007 and still face my predicted 2006 success rate.

Thus it seems statistically valid to calculate your SWR on a portfolio high point - and even take out a buch of extra mad money from the intervening years during which you "could have been ERd" . Intuitively we are not comfortable with this because we conclude we have more information about the market at the later date than the earlier, i.e we already know we are starting on a downturn so we are on one of the model scenarios that is more likely to fail. True, but historically we can also expect that the market cycle will turn up in time to save us if the model is valid.

Since I wouldn't act on this line of reasoning, I guess I implicitly accept that SWR should vary to some degree based on an estimate of whether the market is over or under valued. I can't figure that out to my satisfaction so I will start out low and adjust a little downward if the first few years happen to turn bad.
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Re: Greater than 4% Withdrawal Rate
Old 01-18-2007, 07:34 AM   #40
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Re: Greater than 4% Withdrawal Rate

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Rich, FIRED, check out this post from Dory on the "Best of..." board. I think it will answer your questions:
http://early-retirement.org/forums/i...99243#msg99243
Yup, stated much better than I could have. I fully understand that you can up the ante after you have experienced a good sustained run, without loss of safety. That is like dealing a new hand.

The problem I was concerned about comes with a prospective strategy to increase withdrawals during sporadic "good years" and fail to decrease them during sporadic bad years.

Raise withdrawals after a run up of several years? Sure. OTOH, if I did that and then hit a prolonged bad stretch I would probaby tighten the belt, too. I think you are well advised to either adjust it for inflation forever, or to balance increases with comparable decreases (i.e. a variation of the fixed percent of assets withdrawal strategy).
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