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Re: Greater than 4% Withdrawal Rate
Old 01-18-2007, 01:56 PM   #61
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Re: Greater than 4% Withdrawal Rate

Quote:
Originally Posted by tui_xiu
I still don't understand how resetting on good years can in any way impact your initial chance of success that's based on a certain withdrawal rate.

Jane retires in 2005 with 1,000,000 and decides on a 4% withdrawal rate (40,000) that gives 95% chance of success. What a great year, Jane's portfolio in 2006 is now 1,200,000. Jane resets and decides to take 4% from her new stash so now she's living large with 48,000 withdrawal. 4% rate, 95% chance of success.

Joe retireds in 2006 with 1,200,000 and decides on a 4% withdrawal rate. 95% chance of success.

Is Joe's chance of succcess any different from Jane's? They are both have the same sized stash and the same withdrawal rate. If their chances of success are the same (95%) starting in year 2006 then Jane's cherry picking her good year didn't matter.
Sounds good to me. Not to mention (assuming they retired at the same age, and
ignoring gender discrepancies in longevity), Jane's chance of success is actually a little
better because she'll probably die a year earlier.

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Re: Greater than 4% Withdrawal Rate
Old 01-18-2007, 02:36 PM   #62
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Re: Greater than 4% Withdrawal Rate

"A lot of people do not understand that FIRECalc is a worst case calculator or understand what that means."

Actually Firecalc uses the historical gross annual returns for the U.S., ignoring the outcomes of other industrialized nations. Given that virtually all the other countries used by Dimson, Marsh, and Staunton in Irrational Optimists have lower real returns, in some cases with more volatility, its not truly a worst case calculator.

Note also the default investing cost in Firecalc is based on Vanguards index funds, yet these were not available before about 1975, and certainly not popular before 1985, yet it implies it is appropiate to use this with data from prior years, when investing costs were higher, and net returns to the investor are likely smaller.

These returns should be further reduced by the fact that investors tend to invest more late in a bull market, leading to lower returns on dollar weighted basis. I believe Bogle has mentioned this either in his books or in one of his online speeches.

Borrowing from Willam Bernstein, who suggests that you end up about 2% below average from a mostly stock portfolio, and 1% if mostly bonds, due to volatility , we end up with something like this -

Past U.S. stock real return = 7% - 2% = 5%
Past U.S. bond real return = 3% - 1% = 2% so a 60/40 mix = the famous 4%

Past U.S. stock real return = 7% - 2% - 2% costs = 3%
Past U.S. bond real return = 3% - 1% - 1% costs = 1% so our 60/40 = 2%

Reduced further for international returns, dollar weighting, more conservative retiree 40/60 portfolios = near 0%

The developed nations have had about a 2% real growth rate over the last 200 or so years, with net savers making a bit more, say 3%, and net sellers a bit less , say 1%, which is taxed on nominal return, netting about 0%.









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Re: Greater than 4% Withdrawal Rate
Old 01-18-2007, 03:01 PM   #63
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Re: Greater than 4% Withdrawal Rate

Just be careful you don't kill yourself trying to make a living, rmark.

Cb 8)
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Re: Greater than 4% Withdrawal Rate
Old 01-18-2007, 03:06 PM   #64
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Re: Greater than 4% Withdrawal Rate

I work in a university library storage facility, and some days I'm kind of like the Maytag repairman. Except we get online subscriptions to current financial periodicals. (and a lot of stuff on cows, engineering, etc)
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Re: Greater than 4% Withdrawal Rate
Old 01-18-2007, 03:26 PM   #65
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Re: Greater than 4% Withdrawal Rate

I agree you can reset your conventional n% inflation adjusted WR IF you are using the 100% safe SWR.

If you are using 95% (or lower), you do risk having the market go down just after you adjusted and being in that bad 5% unless you readjust downward.

Dan
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Re: Greater than 4% Withdrawal Rate
Old 01-18-2007, 03:36 PM   #66
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Re: Greater than 4% Withdrawal Rate

Quote:
Originally Posted by rmark
Reduced further for international returns, dollar weighting, more conservative retiree 40/60 portfolios = near 0%

The developed nations have had about a 2% real growth rate over the last 200 or so years, with net savers making a bit more, say 3%, and net sellers a bit less , say 1%, which is taxed on nominal return, netting about 0%.


So I guess what you are saying is that ER/SWR is a fools game. This forum should be taken down and we all need to save up enough to live on principle for the rest of our lives because there is no such thing as a positive ROI. I always thought that if retirement was impossible I would like to work in a Library. Are you hiring RMark?









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Re: Greater than 4% Withdrawal Rate
Old 01-18-2007, 03:52 PM   #67
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Re: Greater than 4% Withdrawal Rate

By late life, with conservative portfolios, yes I suspect 0% returns. Thats what my reading suggests. I think you may be just dividing your money over your remaining lifetime.

Arnott “Disentangling value and size” article
Arnott, Casscells “Demographics and capital market returns” paper
Cooley, Hubbard, Walz “Sustainable withdrawals from your retirement portfolio”
Dichev “What were stock investors actual historical returns?” paper
Dimson, Marsh, Staunton “Irrational optimism” paper
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”
Grossman, Shore “Cross section of stock returns before WW1” paper
Jorion “Long term risks of global stock markets” paper
Jorion, Goetzmann “Global stock markets of the 20th century” paper
Lewellen “Predicting returns with financial ratios” paper
Milevsky “Retirement ruin and the sequencing of returns” paper
Taleb “Focus on the exceptions that prove the rules” article
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Re: Greater than 4% Withdrawal Rate
Old 01-18-2007, 04:14 PM   #68
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Re: Greater than 4% Withdrawal Rate

Quote:
Originally Posted by rmark
"A lot of people do not understand that FIRECalc is a worst case calculator or understand what that means."

Actually Firecalc uses the historical gross annual returns for the U.S., ignoring the outcomes of other industrialized nations. Given that virtually all the other countries used by Dimson, Marsh, and Staunton in Irrational Optimists have lower real returns, in some cases with more volatility, its not truly a worst case calculator.
Actually, it is. It takes the data for S&P500, bond and CPI and looks for the worst case historical retirement survival sequence. Thus, it is by definition a worst case calculator. You can argue about whether fixed expense ratio, or any other data within it are appropriate, but the simulation portion of the calculator is a worst case engine.


Quote:
These returns should be further reduced by the fact that investors tend to invest more late in a bull market, leading to lower returns on dollar weighted basis. I believe Bogle has mentioned this either in his books or in one of his online speeches.
How you use the results from FIRECalc is, of course, open for debate. If you choose to trade, invest in additional asset classes, or pay high fees and trading costs, your mileage will vary. But, again, that does not change the fact that FIRECalc is a worst case simulation engine applied to a specific set of data.

Quote:
Borrowing from Willam Bernstein, who suggests that you end up about 2% below average from a mostly stock portfolio, and 1% if mostly bonds, due to volatility , we end up with something like this -

Past U.S. stock real return = 7% - 2% = 5%
Past U.S. bond real return = 3% - 1% = 2% so a 60/40 mix = the famous 4%
That's not how everyone reads William Bernstein and that is not where the 4% number comes from. The Trinity Study and Guyton are the ones that first published historical worst case simulator results that provided the 4% results. If your averages were applied to the problem, then the 4% withdrawal rate would preserve net egg value forever. That is not the case for the Trinity Study results which looked at specific retirement lengths up to 30 years. Guyton, I believe, extended the studies to 40 years.

To some extent, none of this matters for the typical retiree. The 4% number should be viewed as a guideline, not a rigid rule.
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Re: Greater than 4% Withdrawal Rate
Old 01-18-2007, 04:16 PM   #69
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Re: Greater than 4% Withdrawal Rate

Quote:
Originally Posted by Animorph
I agree you can reset your conventional n% inflation adjusted WR IF you are using the 100% safe SWR.

If you are using 95% (or lower), you do risk having the market go down just after you adjusted and being in that bad 5% unless you readjust downward.
Exactly. You can reset any time you want and will be just like someone else just starting out on FIRE. But if you do it too frequently and only do so for the UP years, you can run into trouble as you state. Do it for both up and down years and you are back to pcnt of assets strategy.
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Re: Greater than 4% Withdrawal Rate
Old 01-18-2007, 04:26 PM   #70
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Re: Greater than 4% Withdrawal Rate

Here's how I'm understanding it now -- whenever you reset, that is like wiping the board clean -- you reset around that portfolio value and whatever shenanigans you've done in years past are no longer relevant. You have x in the portfolio and you start setting your withdrawals accordingly, raising them by inflation etc over the following years.

If you reset again relatively frequently, you'll never have a chance to find out whether your approach was going to be safe or not for the 30 or 40 year timeframe.

It is only when you really follow one of these annual-inflation-raise plans for a long time that you find out if it is safe or not, and by then it's too late to do anything about it if you are in a worst case scenario. The safety was compromised by having given yourself the full inflation raises over the intevening years, even when that meant you were withdrawing substantially more than 4% of that year's portfolio value.

If you never or rarely go beyond the 4% of portfolio value (akin to resetting every year) then my research shows you've got a very high chance of keeping the portfolio intact in real terms over the medium and long runs.
In other words, resetting is not the problem -- the problem is in continuing to give yourself annual inflation raises during a period of high inflation and low market return, when you are in effect withdrawing at much higher-than-4% rates.
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Re: Greater than 4% Withdrawal Rate
Old 01-18-2007, 04:31 PM   #71
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Re: Greater than 4% Withdrawal Rate

Quote:
Originally Posted by sgeeeee
To some extent, none of this matters for the typical retiree. The 4% number should be viewed as a guideline, not a rigid rule.
Oh, great, that'll start a new thought process:

"But... but... but... if I don't follow anyone's rigid rules and I run out of money, then it's my own fault and I can't sue anyone!!
Maybe I should evade all personal financial responsibility keep working for another year or two to make sure I have enough... yeah, that's it... just three or four more and then I'm really done..."
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Re: Greater than 4% Withdrawal Rate
Old 01-18-2007, 04:33 PM   #72
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Re: Greater than 4% Withdrawal Rate

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Originally Posted by Nords
Oh, great, that'll start a new thought process:

"But... but... but... if I don't follow anyone's rigid rules and I run out of money, then it's my own fault and I can't sue anyone!!
Maybe I should evade all personal financial responsibility keep working for another year or two to make sure I have enough... yeah, that's it... just three or four more and then I'm really done..."
I think you should go back to work, Nords. Now, if you don't follow this advice, you can't sue me.
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Re: Greater than 4% Withdrawal Rate
Old 01-18-2007, 07:19 PM   #73
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Re: Greater than 4% Withdrawal Rate

Quote:
Originally Posted by tui_xiu
I still don't understand how resetting on good years can in any way impact your initial chance of success that's based on a certain withdrawal rate.

Jane retires in 2005 with 1,000,000 and decides on a 4% withdrawal rate (40,000) that gives 95% chance of success. What a great year, Jane's portfolio in 2006 is now 1,200,000. Jane resets and decides to take 4% from her new stash so now she's living large with 48,000 withdrawal. 4% rate, 95% chance of success.

Joe retireds in 2006 with 1,200,000 and decides on a 4% withdrawal rate. 95% chance of success.

Is Joe's chance of success any different from Jane's? They are both have the same sized stash and the same withdrawal rate. If their chances of success are the same (95%) starting in year 2006 then Jane's cherry picking her good year didn't matter.
I think that if Jane decides to reset her withdrawal rate to 4% of rising portfolio at some point she will not be able to reset to higher withdrawal. After n year(s) of rising portfolio there will be down year(s) and during those down years and after that she will never be able to raise her withdrawal rate as portfolio will never reach 25x of inflation adjusted number of nth year's withdrawal. Basically Jane is starting at the worst start year of firecalc simulation on year n+1. This can be tested with modified firecalc/excel.

This means one can keep on resetting upwards as long as possibly. Of course assuming future is like past.
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Re: Greater than 4% Withdrawal Rate
Old 01-18-2007, 07:29 PM   #74
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Re: Greater than 4% Withdrawal Rate

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Originally Posted by landover
Basically Jane is starting at the worst start year of firecalc simulation on year n+1. This can be tested with modified firecalc/excel.

This means one can keep on resetting upwards as long as possibly. Of course assuming future is like past.
If she starts at "the worst start year of firecalc simulation " and the sim has a 95% success probability then she probably picked one of the 5% failures. Of course this depends on how the market does in reality, because maybe there is no starting year that will fail in her 30 yr period. However picking "the worst start year" to start her retirement makes it certian that if there is a start year that produces a failure she picked it.
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Re: Greater than 4% Withdrawal Rate
Old 01-18-2007, 08:09 PM   #75
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Re: Greater than 4% Withdrawal Rate

and poor Joe, who had managed to accumulate a much higher net worth before retiring and takes the same conservative 4% withdrawal rate... goes down in flames along with Jane, victim of that remaining 5%
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Re: Greater than 4% Withdrawal Rate
Old 01-18-2007, 08:49 PM   #76
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Re: Greater than 4% Withdrawal Rate

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Originally Posted by ESRBob
In other words, resetting is not the problem -- the problem is in continuing to give yourself annual inflation raises during a period of high inflation and low market return, when you are in effect withdrawing at much higher-than-4% rates.
Bravo! You have hit the nail directly on the head! It's not the initial 4% that causes portfolio failure, it's the inflation adjusted raises even though the portfolio is underperforming.

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Re: Greater than 4% Withdrawal Rate
Old 01-18-2007, 09:00 PM   #77
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Re: Greater than 4% Withdrawal Rate

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Originally Posted by audreyh1
Bravo! You have hit the nail directly on the head! It's not the initial 4% that causes portfolio failure, it's the inflation adjusted raises even though the portfolio is underperforming.
Precisely.

If you only reset the SW amount when your portfolio is up, you are very vulnerable when you take that same withdrawal amount during down years. To be safe, either start with 4.x% and inflation-adjust annually, or use 4.x% of assets each year, whether the portfolio balance is up, down or the same.
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Re: Greater than 4% Withdrawal Rate
Old 01-18-2007, 10:03 PM   #78
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Re: Greater than 4% Withdrawal Rate

We're still going to be shooting at a moving target. Some years Peter gets robbed to pay Paul. Some years both Peter and Paul make a profit. That's just the risk in market investing. I hope to LBYM and stay well below the 4% SWR until I get a few years older.

FIRECalc is a great tool and it made me feel better the first few times I ran my numbers throught it. However, the timing the bulls and bears choose is out of my jurisdiction!

Add economics and politics to the mix and I am really in the dark. Will Congress respond to the Fed Chief's warning about "the consequences of baby boomer retirements" looming around the corner? Will economic disparities between those who have planned for retirement and have a $1M nest egg and those who have saved nothing lead the US to adopt a "wealth tax" to bail out future generations of consumers? These are only a few issues.

To make a solid plan for financial independence is indeed a wise thing to do. But I would probably think myself insane trying to finely predict the results over the next 30 years! An article in the current issue of the Wilson Quarterly magazine suggests that a sizable chunk of our accumulated wealth will probably end up in the hands of charities or the government anyway.

I wonder if Art Buchwald ever worried about SWR or Monte Carlo simulations?

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Re: Greater than 4% Withdrawal Rate
Old 01-18-2007, 10:13 PM   #79
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Re: Greater than 4% Withdrawal Rate

Quote:
Originally Posted by OkieTexan

I wonder if Art Buchwald ever worried about SWR or Monte Carlo simulations?

I think not. I believe he was working until a few weeks ago. God bless a very funny man.
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Re: Greater than 4% Withdrawal Rate
Old 01-18-2007, 10:30 PM   #80
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Re: Greater than 4% Withdrawal Rate

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To make a solid plan for financial independence is indeed a wise thing to do. But I would probably think myself insane trying to finely predict the results over the next 30 years! An article in the current issue of the Wilson Quarterly magazine suggests that a sizable chunk of our accumulated wealth will probably end up in the hands of charities or the government anyway.
I know of no successful company that does not budget for both the short and the long term. Indeed it is a key control and process to almost every enterprise. To ignore the short term and only focus on a well made long term budget in essence is to ignore financial reality of current situation, whether it is improving or declining. The current situation has affected your long term budget - not reviewing is merely refusing to perceive the change.

If there are enough funds or fortune is on your side then ignoring the changes that are real have no consequence. To anyone who has enough money that a 4% or even 3% withdrawl is not a real necessity is truly fortunate. For many though, in many cases widows of the financial planners of a family end late in life with no portfolio as an all too real occurence. At the same time a safe increase in a portfolio with a reasonable (95%) chance of success may be worth adjusting to have a more enjoyable retirement. Both situations deserve review whether annually or biannually in my opinion.

Sometimes it may be best to steer your boat to avoid the icebergs or maybe into a port for some well-deserved R&R. For those with enough funds to build boats as needed, direction is irrelavent.
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