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Old 05-20-2009, 07:53 AM   #21
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I've read that 5% number before for charities - it does seem at odds with the 4% for 30 year number - does adjusting to the current portfolio really make that big a diff?
Keep in mind that charities typically also have new money coming in as well as the existing account balance. That could make a difference between, say, 4% and 5% in terms of sustainability.
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Old 05-20-2009, 08:43 AM   #22
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I've read that 5% number before for charities - it does seem at odds with the 4% for 30 year number - does adjusting to the current portfolio really make that big a diff?
I think this goes back to the title of the thread. The 4% is a percent of the original fund, increased for inflation. The 4% is a lot less than the expected average return on the portfolio. The retiree gives up a lot of potential withdrawals to maintain a high probability of never decreasing because the retiree can't cover the basics on anything less. In most cases, the retiree dies with a lot more money than he had when he retired.

The 5% assumes the charity has some flexibility in what it funds. My impression is that the IRS is very flexible about "average of recent years' balances" and all that, but on the "high payouts vs. never drop below my minimum need payouts" spectrum it is pushing the fund a little in the direction of "high" and taking a little more risk on the minimum.

From a public policy perspective, I am uncomfortable with giving tax breaks to funds that simply get bigger and bigger, so I like the idea of some gov't requirements for withdrawals, even if that means the fund isn't immortal.
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Old 05-20-2009, 08:54 AM   #23
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From a public policy perspective, I am uncomfortable with giving tax breaks to funds that simply get bigger and bigger, so I like the idea of some gov't requirements for withdrawals, even if that means the fund isn't immortal.
Agreed. Money given to tax-exempt charities and non-profits should be used for the mission of the organization, not simply hoarded. There's too much cash-hoarding going on today as it is.
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Old 05-21-2009, 11:30 AM   #24
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Actually you can take any amount per year and never go broke as long as you adjust withdrawls to the current balance. E.g. If you decided on 30% per year withdrawals and found your balance down to $100, then the market declined by 50%, you would still have $35 left the next year :-)

But seriously, it's become clear to me that most real investors do neither the strict 2.5-4% of original nor the strict 5% of current. Most do something in between, trying to keep the payouts relatively contant while letting them drift based on the current balance.

So I think people should keep track of how firecalc results turn out for both approaches, and anticipate that they will end up somewhere between.
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Old 05-21-2009, 11:35 AM   #25
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Agreed. Money given to tax-exempt charities and non-profits should be used for the mission of the organization, not simply hoarded. There's too much cash-hoarding going on today as it is.
I don't understand the concern. As long as the money cannot be pulled out for non-mission uses, why should you care if there is an organization that has very long term goals. My vanguard charitable giving account no longer requires distributions every year, and I like the freedom to be able to give on my schedule not the IRS's.

Don't mean to pull this thread off topic though...
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Old 05-21-2009, 11:46 AM   #26
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I don't understand the concern. As long as the money cannot be pulled out for non-mission uses, why should you care if there is an organization that has very long term goals. My vanguard charitable giving account no longer requires distributions every year, and I like the freedom to be able to give on my schedule not the IRS's.
I'm talking about very large charitable foundations and endowments, not small individual charitable trusts.
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Old 05-23-2009, 07:23 AM   #27
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I’d reject it too for actual use, instead treating it as an experimental calculation to start from. While a good starting point, it only uses 5% of the available world market history and ignores investor actions (as it must – but that means I need to weight the result down to accommodate poorly timed withdrawals).
Cooley, Hubbard, Walz (1999) 4% of initial portfolio + annual inflation for up to 30 years from a roughly 60% stock, 40% corporate bond portfolio, based on US data 1926 – 1999.
Pye (2001) 4% of initial portfolio + annual inflation reduced to 3% by ‘typical’ investing costs and taxes.
Dimson, Marsh, Staunton (2003) 14 other countries 1900-2000 had lower returns and/or higher volatility than the US 1926-1999 data.
Dichev (2004) investors have lower returns than the buy-and-hold sample used in market histories.
Dalbar has similar studies showing that most investors receive below average returns.

On income - retiree finance has 2 parts, withdrawals from a pension + portfolio and cash flow within that pension + portfolio. Income (actually cash flow) is meaningful only with a stated withdrawal rate.
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Old 05-23-2009, 12:19 PM   #28
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I'm talking about very large charitable foundations and endowments, not small individual charitable trusts.
But look at something like the Nobel prizes. When Nobel set it up, I assume his goal was to hand out grants each year into perpetuity, and he would want those grants to increase with inflation to maintain their actual value. If not, those grants could look like peanuts after 50 years or so.

At 4% WR starting and inflation adjusted each year, Firecalc says the portfolio might run out of money. And at 5% WR of the portfolio each year, you will never run out, but those grants could shrink considerable in value. I keep coming up with ~ 2.5% inflation adjusted SWR for a 'forever' portfolio.

Unlike the educational grants, I don't think Nobel relies on outside contributions, or at least I don't think that was Nobel's intent? So the 5% WR still seems odd to me as a requirement, if the deceased wishes are really to have an iinflation adjusted grant program 'forever'. Which doesn't seem unreasonable.

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Old 05-23-2009, 01:19 PM   #29
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Further to my last post, did a bit of wiki work and found (bold mine)....

http://nobelprize.org/nobelfoundation/finan-manag.html

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Financial Management

... Nobel stipulated in his will that most of his estate, more than SEK 31 million (today approximately SEK 1,600 million) should be converted into a fund and invested in "safe securities."

The income from the investments was to be "distributed annually in the form of prizes to those who during the preceding year have conferred the greatest benefit on mankind."

... According to the original 1901 investment rules, the term "safe securities" was, in the spirit of that time, interpreted to mean gilt-edged bonds or loans backed by such securities or backed by mortgages on real estate. With the changes brought about by the two World Wars and their economic and financial aftermath, the term "safe securities" had to be reinterpreted in the light of prevailing economic conditions and tendencies. Thus, at the request of the Foundation's Board of Directors, in the early 1950s the Swedish Government sanctioned changes, whereby the Board for all practical purposes was given a free hand to invest not only in real estate, bonds and secured loans, but also in most types of stocks.

From 1901, when the first prizes (SEK 150,000 each) were awarded, the prize amounts declined steadily. But with this freedom to invest, along with the long-fought-for tax-exemption granted in 1946, it was possible to reverse this trend and, on average, even keep pace with increasing inflation. The real value of the prize amount in SEK terms was finally restored in 1991.
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The amount of the 2008 Nobel Prize is SEK 10.0 million.

The invested capital at market value as per December 31, 2007, amounted to SEK 3,628 million (approx. USD 560 million).
Wait a minute, does that mean they only award 0.276% ? That looks like a pretty "safe" withdraw rate! I assume Sweden does not have that 5% rule (or this was grandfathered in), for charitable foundations.

Looks like they only started out at ~ 0.48% interest/divs to award? 150K/31M = 0.48%? I'm guessing some of those "safe" investment did not pay out an annual dividend?


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Old 05-23-2009, 01:34 PM   #30
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But look at something like the Nobel prizes. When Nobel set it up, I assume his goal was to hand out grants each year into perpetuity, and he would want those grants to increase with inflation to maintain their actual value. If not, those grants could look like peanuts after 50 years or so.
Perhaps so, but that's more a point for Swedish law, and since I'm not Swedish, it's no concern of mine.
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Old 05-24-2009, 08:19 AM   #31
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There's a pretty interesting story as to why the Harvard endowment got into this pickle.

Misalignment of the investors and the University committee.

The investment policy had the endowment 110% invested and in a lot of illiquid assets. But the University wanted to spend a high amount of the income in the next few years for buildings, etc. As a result, they got in a liquidity crunch and needed to sell at the wrong time.

The 110% strategy could have been right if they didn't have the immediate income needs.

Hopefully individual investors don't have that fundamental misalignment.
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Old 05-24-2009, 09:12 AM   #32
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Obviously Ivy League education doesn't prevent bad choices.
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Old 05-24-2009, 04:04 PM   #33
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Where do you think all the bankers, money managers, and policy makers who got us into this situation went to school? The really "smart" ones who came up with the new investments? I begin to question the value of the Ivy League education.
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Old 05-24-2009, 04:29 PM   #34
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Where do you think all the bankers, money managers, and policy makers who got us into this situation went to school? The really "smart" ones who came up with the new investments? I begin to question the value of the Ivy League education.
They are smart enough to know where the old boy network of old money went to school like the five privileged generations before them, and that said old boy network makes a lot of executive hiring decisions in big business. These people have a vested interest in protecting the "value" of their own education (and those of their "legacy" children and grandchildren) by making sure only candidates from the "right" schools get the top jobs. It has less to do with the quality of the education than with the name on the "label" in many cases.

In case you couldn't tell, no, I'm not cynical.
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Old 05-25-2009, 07:55 PM   #35
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I have personal experience that a Harvard education is not all it's cracked up to be.
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Old 05-25-2009, 08:21 PM   #36
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I have personal experience that a Harvard education is not all it's cracked up to be.
How so? Just out of curiosity I might add
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Old 05-25-2009, 08:32 PM   #37
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W*rkplace issue. Can't go into detail.
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Old 05-25-2009, 08:34 PM   #38
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W*rkplace issue. Can't go into detail.
Gotcha thanks though Meadbh
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Old 05-25-2009, 08:35 PM   #39
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I have personal experience that a Harvard education is not all it's cracked up to be.
The education doesn't have to be. The reputation and the network does.
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Old 05-26-2009, 02:41 PM   #40
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Harvard's not really rejecting the FIRECalc approach, because they've never really adhered to it in the first place. Harvard enjoyed years of double digit, often times 20%+, returns but yet last year they still spent what looks like 4.3% of their principal. So either they started with a much higher initial withdrawal rate, or they've grown their withdrawals by much more than inflation. In either case, they haven't been playing by the same rules.

In fact, if you look at this graph, harvard.png (image) it seems like they employ something more similar to a fixed percentage withdrawal strategy. So if that is the case, it makes perfect sense for them to reduce their spending when the portfolio tanks.

I guess they just never thought they'd ever lose a lot of money . . . and for a long while they never did.



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