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Re: Help me design a portfolio that generates $50,000 a year
Old 05-27-2006, 05:15 PM   #21
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Re: Help me design a portfolio that generates $50,000 a year

I have some data to offer.

I just ran a primitive sensitivity analysis on Firecalc for various values of SS. The methodology was to accept all defaults in Advanced Firecalc and change nothing at all other than the SS number. I left the SS date alone for each run. I selected the option that provides the withdrawl magnitude that yields 95% confidence.

The results are like so:

SS SWR
20K 5.1%
19K 5.05%
18K 5.01%
17K 4.97%
16K 4.92%
15K 4.87%
14K 4.81%
13K 4.75%
12K 4.69%
11K 4.63%
10K 4.57%

My previous result above in the thread for 10K was 4.65% because the guy we were talking about needed the year of first receipt nudged per his age. This result here is the pure Firecalc default for the current discussion.

9K 4.51%
8K 4.45%
7K 4.39%
6K 4.33%
5K 4.27%

And I stopped there because it is pretty clearly a 0.05ish adjustment to SWR per thousand bux of Soc Sec. at that number of years into the future.

There's probably a consensus that SS is going to be lower in the future than today. How much lower you can evaluate as you wish consistent with your own pessimism. I guess everyone will do their own SS evaluation and then apply a reduction in the magnitude by X%. The result of that should go to the table above to get The Correct SWR Number, which is just simply, profoundly NOT 4%. It's higher.
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Re: Help me design a portfolio that generates $50,000 a year
Old 05-27-2006, 08:28 PM   #22
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Re: Help me design a portfolio that generates $50,000 a year

Quote:
Originally Posted by rodmail
Even Nords says SS should be considered, and then retreats to the 4% number.
Rodmail, you're quoting me out of context in order to support your point. I don't appreciate that.

I don't care one way or the other whether SS is "there for us" or whether it's included in FIRECalc. My point about SS, as was my point about SWRs and allocations, is that there are risks & rewards to be considered. The reward may be enticing in the early stages of retirement, but it's not worth the risk in the later stages if we're too frail to do anything to mitigate that risk. I don't have a strong opinion one way or the other on when I take SS and I'm probably going to keep flip-flopping on the issue until my 62nd birthday. Or my 67th. Or maybe my 70th.

You may be right about your 4.65%, however I think your estimate is excessively precise when you're using a calculator whose definition of success is pretty much anything 80% or higher. SWRs are cut with chainsaws and don't need to be measured with electron microscopes. I'm not going to nitpick the quantities and I think that there's enough room in this area for there to be more than one right answer.

So go find your own quotes. Or go build your own calculator.
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Re: Help me design a portfolio that generates $50,000 a year
Old 05-27-2006, 09:49 PM   #23
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Re: Help me design a portfolio that generates $50,000 a year

Quote:
Rodmail, you're quoting me out of context in order to support your point. I don't appreciate that.
It was a hurried quote; not a provocative one and not contrived because mathematics is on my side in this. But without question I am not looking to cause upheaval and my apologies for the annoyance.

A tenth of a % on SWR is not nitpicking. It's a serious difference. It's $1000 of spending on a million dollar portfolio. 4.6 is 6K more than 4%. 4% is therefore a 15% pay cut. The evolution of 4% to become a rule of thumb is misleading the typical cognizant American by a full 15% as to what they should be able to safely spend.

It needs to be undone.
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Re: Help me design a portfolio that generates $50,000 a year
Old 05-27-2006, 10:22 PM   #24
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Re: Help me design a portfolio that generates $50,000 a year

Quote:
Originally Posted by rodmail
It was a hurried quote; not a provocative one and not contrived because mathematics is on my side in this.* But without question I am not looking to cause upheaval and my apologies for the annoyance.
A tenth of a % on SWR is not nitpicking.* It's a serious difference.* It's $1000 of spending on a million dollar portfolio.* 4.6 is 6K more than 4%.* 4% is therefore a 15% pay cut.* The evolution of 4% to become a rule of thumb is misleading the typical cognizant American* by a full 15% as to what they should be able to safely spend.*
It needs to be undone.
Thank you, although I'm not sure if that apology is coming from you or from my old math teacher.* If math is on your side then you can enjoy your ER with the serenity that comes from being truly virtuous.* Quote the numbers & percentages if you want, but I'll say it again-- I'm not nitpicking the numbers.* By cluttering up the conversation with them it's possible that you're also missing or avoiding my point.

"It" doesn't need to be undone.* Nothing's "wrong", no laws are being "violated", and no one is being hurt by an SWR that's a little different than someone else's SWR.* if a poster is more comfortable with 4% than 5% then I'd stop arguing the math in order to accomodate differences in risk tolerance and "sleep at night" peace of mind.*

You're trying to apply logic to a situation where its application is inappropriate.* There may be binary math but there's also the mathematics of chaos theory.* Both can peacefully coexist and both can be equally wrong if incorrectly applied to inappropriate situations.

You're haranguing a bunch of people who've managed to get this far with 4%.* Some of us enjoy 5% and a few enjoy 6%, just as there are some out there with 3%.* We're interested in seeing what range of SWRs is going to lead to what risks, and some are more interested in seeking out those risks than others.* If you're concerned about a 15% paycut then it should give you great pleasure from withdrawing a little extra money.* But if someone else is comfortable at a lower SWR then we should also be able to bask in the warm glow of their success without feeling compelled to point out that they're failing to fully optimize their SWR...
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Re: Help me design a portfolio that generates $50,000 a year
Old 05-28-2006, 02:13 PM   #25
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Re: Help me design a portfolio that generates $50,000 a year

Quote:
Originally Posted by Cute Fuzzy Bunny
Anything other than ballparking it with 30-40% margins is a folly.
I am not completely sure what you mean by 30-40% margins. Could you clarify what you are saying and how you calculating the 30-40% margin? Not sure what Nord's means by 10% belt tightening either.

Thanks
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Re: Help me design a portfolio that generates $50,000 a year
Old 05-28-2006, 04:59 PM   #26
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Re: Help me design a portfolio that generates $50,000 a year

Quote:
Originally Posted by Cut-Throat
No and I didn't say that.
Glad you noticed. But I'd point out that I didnt say what you thought *I* said either, before you disagreed with it
Quote:
Originally Posted by Hydroman
I am not completely sure what you mean by 30-40% margins. Could you clarify what you are saying and how you calculating the 30-40% margin? Not sure what Nord's means by 10% belt tightening either.
I think Nords said it well above. Applying logic and precision to something illogical, chaotic and imprecise at best. Presume a margin of error on anything you cannot absolutely and positively be sure of measuring with certainty.

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Re: Help me design a portfolio that generates $50,000 a year
Old 05-28-2006, 05:47 PM   #27
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Re: Help me design a portfolio that generates $50,000 a year

Quote:
I think Nords said it well above. Applying logic and precision to something illogical, chaotic and imprecise at best. Presume a margin of error on anything you cannot absolutely and positively be sure of measuring with certainty.
Sounds good. Just be sure the center of equidistant risk margin evaluation is positioned at 4.65%. And we must be sure this is told to all newcomers with an expectation of Soc. Sec. and put 4% to rest in its grave.

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Re: Help me design a portfolio that generates $50,000 a year
Old 05-28-2006, 05:53 PM   #28
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Re: Help me design a portfolio that generates $50,000 a year

Quote:
Originally Posted by Hydroman
Not sure what Nord's means by 10% belt tightening either.
Just the ability to defer spending for a year or two of an ugly market. *Keep driving a beater for another year or two, skip the second cruise, put off that neighbor island vacation, and don't upgrade the media room. *In a really bad decade you might even (*gasp*) consider ESRBob's approach of temporary work. *("Temporary work" sounds so much more palatable than "Thank you for shopping at Wal-Mart!") *Of course before then you'd also check into selling plasma or redundant organs.

Some people actually continue to save money during retirement. *Belt-tightening would mean that you don't add to those savings.

Quote:
Originally Posted by Cute Fuzzy Bunny
Sometimes god doesnt feel like smiling. *Anything other than ballparking it with 30-40% margins is a folly. *But then a lot of people want to analyze and plan to the finest details, even though they cant control them.
FIRECalc and all the other financial calculators are trying to predict the future, and Bernstein's five-part "Calculator From Hell" article essentially says that any success rate higher than 80% would require a guarantee that there won't be any surprises for many decades-- no world wars, terrorist incidents, global depressions, oil crises, or dot-com implosions.

While FIRECalc will project history with impressive precision, it's a crapshoot. *It's making sure that your portfolio doesn't fail more frequently in the past than you might be able to handle, even though as Dory says some of the data runs end with a balance of 12 cents. *It's trying to project into the future farther than its history will allow (how many complete runs can you get for a 50-year ER?) and it can't handle anything that history hasn't already covered. *Read Dimson's "Triumph of the Optimists"-- Schiller's returns data may be the best available, but it's filled with interpolations and inaccuracies because companies didn't always report honestly, let alone fully & accurately. *Today's stock indices don't even remotely compare to those of five decades ago, let alone a century ago, and the S&P500 makes significant changes every decade. *Dividend rates have changed over decades. *Tax rates change. *Tax laws have affected investment strategies and their corresponding returns. *Correlations among asset classes have changed over time and will continue to do so unpredictably. *Entire asset classes have been created in the last 20 years that never existed before, and we have no idea what future asset classes are being created. *Monte Carlo simulations are unable to fully model the correlations between one year's returns and the next, let alone all of the other factors.

So, yeah, you can tell me that you have to raise your spending to squeeze out every last bit of performance from your portfolio and not waste your opportunities. *You just can't tell me that you won't need it for some totally unforeseen problem. *I'm no Scrooge McDuck but I don't want to have to ask my kid to pay my grocery bills for me.

Although I agree with Cut-Throat's "What are you saving it for?" philosophy, and I've loosened up my wallet in a couple of small ways, I'm also finding out that the things & experiences I value don't cost a lot of money. *I can only keep track of so many longboards & home improvements, and I can only take so many fantasy vacations. *I can only do martial arts for a certain number of years (it may be too late already). *I'd rather charitably donate my time than my money because there'll be plenty of time to donate my money after I'm not using it anymore.

So I'm finding it hard enough to raise my spending in the first place. *IMO arguing over decimal points elevates the discussion from theory to absurdity.
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Re: Help me design a portfolio that generates $50,000 a year
Old 05-28-2006, 06:06 PM   #29
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Re: Help me design a portfolio that generates $50,000 a year

Quote:
Originally Posted by Nords
IMO arguing over decimal points elevates the discussion from theory to absurdity.
100% 99.35% true.

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Re: Help me design a portfolio that generates $50,000 a year
Old 05-28-2006, 06:14 PM   #30
 
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Re: Help me design a portfolio that generates $50,000 a year

I agree that a decimal point discussion of what is an SWR is, borders on the ridiculous. I think we have to remember that the 4% withdrawal is a 'worst case historical' rate. So maybe it is 4.6% - or if the economy does better than the gloom and doomers think it might be 6 or 7 %!

The point is, you have to be willing to be flexible. I think it makes far more sense to have the 4% include 2% mandatory and 2% discrentionary spending. That way you can adjust, if something goes south.

Anyone that thinks it is possible to 'wake up at age 85 with no assets', is probably not registered on this forum! - I think you might take a peek at your portfoilo at age 72, and change a few spending patterns!

If it pains you to spend money or you don't enjoy it, don't do it! - You don't have to spend 4% - As for myself I love burning Cash! - I would have no problem spending $100 Million! And I would enjoy it! 8)

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Re: Help me design a portfolio that generates $50,000 a year
Old 05-28-2006, 06:31 PM   #31
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Re: Help me design a portfolio that generates $50,000 a year

Everyone will do whatever they want, of course. But since decimal points are not worth troubling over, then since 4.65% is closer to 5% than 4%, let's make 5% the standard.

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Re: Help me design a portfolio that generates $50,000 a year
Old 05-28-2006, 06:48 PM   #32
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Re: Help me design a portfolio that generates $50,000 a year

Quote:
Originally Posted by rodmail
Everyone will do whatever they want, of course.* But since decimal points are not worth troubling over, then since 4.65% is closer to 5% than 4%, let's make 5% the standard.
As I'm saying for the third time, I'm not debating the math. I'm trying to point out that the consequences of being a little bit wrong are far more severe than the consequences of being way too much right.

There's no one answer to the "help me design a portfolio", especially when the person posing the question isn't familiar with asset allocation or historical rates of return or volatility tolerance. As Taylor Larimore over at the Vanguard Diehards board says, "There is more than one road to Dublin".

Alerted to those caveats, you are entitled to go forth and to make your own darn decisions for yourself. Hopefully you'll have noticed by now that there are as many "standards" as there are early retirees.

I think it's a disservice (especially to those who are still learning about ER) to flatly state a number without acknowledging the risks and uncertainties surrounding its derivation. You're well within your rights to preach anything you like, but I think that you need to stop trying to convert the rest of the congregation.
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Re: Help me design a portfolio that generates $50,000 a year
Old 05-28-2006, 06:48 PM   #33
 
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Re: Help me design a portfolio that generates $50,000 a year

Quote:
Originally Posted by rodmail
Everyone will do whatever they want, of course. But since decimal points are not worth troubling over, then since 4.65% is closer to 5% than 4%, let's make 5% the standard.

I've got an even better formula for you. Every year take 50% of your portfolio and spend it. You'll never run out of money! And you can tell people that your SWR is 50%!
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Re: Help me design a portfolio that generates $50,000 a year
Old 05-28-2006, 06:58 PM   #34
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Re: Help me design a portfolio that generates $50,000 a year

Nope

5% variable - started last year after 12 years of 'cheap bastardhood'.

Also plan to croak precisely at 84.6 - my latest life expectancy estimate from IRS RMD tables - up from 84.3 in the 1990's.

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Re: Help me design a portfolio that generates $50,000 a year
Old 05-28-2006, 09:02 PM   #35
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Re: Help me design a portfolio that generates $50,000 a year

Guys, I don't know what the problem is here. What we have is a preference to drag the uninitiated towards leaving a lot of money to heirs. Let them choose for themselves. Give them the mathematically accurate number, that is already substantially negative since it derives from a lower-than-present-day SS total in it, and let them apply their own risk perspective to that number.

I am astounded that this is not accepted as reality. The results are clear. A social security receiving person should be applying his or her own risk perspectives starting at 4.6%. People can decide whatever risks exist that they choose, but it's just completely clear that the correct starting point for applying those risks is 15% higher than the standard. The standard is wrong as a risk applying centerpoint for SS receiving people.

People have their own sets of fears and that's fine. I think there is a case to be made that dying extraordinarily rich is far, far worse than running out of money a few months before you die. Why? Because you had control over the former. You endured self denial that was not necessary and you did it for decades. Chances are if you ran out of money using an already negative leaning SWR (which 4.6% is) -- then it was simply bad luck, out of your control, and accidents happen.

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Re: Help me design a portfolio that generates $50,000 a year
Old 05-28-2006, 09:10 PM   #36
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Re: Help me design a portfolio that generates $50,000 a year

Quote:
Originally Posted by Nords
As I'm saying for the third time, I'm not debating the math.* I'm trying to point out that the consequences of being a little bit wrong are far more severe than the consequences of being way too much right.*
Nords, you have done a fine job pointing out the down side of retiring too early but you seem to think the only down side of using a lower that necessary W/D rate is that a person dies with a whole lot of money. *I think the bigger down side is that someone using an overly conservative (small) W/D will put off retirement and runs the risk of dieing shortly after or even before they retire. *As has been put forth here by a number of posters the FIRECalc W/D is used for determining when you are ready to retire and there have been a number of suggestions of ways to reasonably increase that percentage (e.g. Bernicke "Reality Retirement Plan" and the part fixed%/ part variable% model) in what I see as an effort to realisticly make retirement a possibility earlier in someones life. *If said someone uses a reasonable approach to estimating their retirement expenses (something like Cut-Throat's) and then pays attention to their portfolio after retiring (i.e. reducing some of their discretionary expenses in bad years) useing one of the methods mentioned above to increase their initial W/D % will also be safe and the retiree will be able to spend more years retired.* However if they believe the much talked of 4% without doing the analysis, they may very well delay.* I still believe the appropriate thing for any prospective retiree to do is to run FIRECalc with all of their numbers and weigh the risks for themselves.
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Re: Help me design a portfolio that generates $50,000 a year
Old 05-28-2006, 09:14 PM   #37
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Re: Help me design a portfolio that generates $50,000 a year

rodmail,
- Running out of money is worse than having money.
- Live on the edge if you want. Really!
- The FIREcalc historical data is not "worst case." Germany in 1930s is "worst case," as are hundreds of other examples. Economic privation is mankind's normal state. We, in the US, particularly since WWII but even before, have not been typical. That is the data used by FIREcalc for domestic returns. So, to assume that the next 50 years will be an extension of the past 50, or 100, is not wise. No, I don't think we should all be stockpiling ammo and condensed milk, but I don't think the numbers ahead will necessarily look a lot like the past.

As others have tried to tell you--you are attributing a level of precision to this business that is not warranted by the data. Given imprecision/uncertainty, the rational course is the conservative one. And, the rational thing to do is to adjust withdrawals as the situation develops over the decades.

So, given the imprecision of it all, why do you want to be out on the bleeding edge?
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Re: Help me design a portfolio that generates $50,000 a year
Old 05-28-2006, 09:42 PM   #38
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Re: Help me design a portfolio that generates $50,000 a year

Quote:
Originally Posted by jdw_fire
Nords, you have done a fine job pointing out the down side of retiring too early...
Well, I think my only accomplishment so far has been getting trolled by someone who's put up 80-something posts on SWR since April Fool's Day. Deja vu all over again. But thanks anyway.

Quote:
Originally Posted by jdw_fire
... but you seem to think the only down side of using a lower that necessary W/D rate is that a person dies with a whole lot of money. I think the bigger down side is that someone using an overly conservative (small) W/D will put off retirement and runs the risk of dieing shortly after or even before they retire.
Can't argue with that ugly scenario, either. Hmmm... dying in my cubicle... eating cat food... dying in my cubicle... eating cat food. Tough choices. I'm just not sure how we quantify which one is more painful or seems to last longer!

Having started my ER during a nasty bear market (without having any idea that this board existed, either) and having watched a few dozen posters work through the process over the last two years, I'd hesitate to recommend an aggressive SWR. No one specifically comes to mind with any high-SWR experience. We had one guy here a while ago who couldn't imagine retiring on less than $85K/year and was quite frustrated that the math couldn't be forced to conform to his standard of living. Another attempted to ER and was extremely upset by watching his money market balance drop by $3000. JohnGalt is ER'd on a very minimal portfolio and claims to have no idea what his SWR is, but I think it's clear from his behavior that his portfolio is barely surviving. I don't think I'd recommend his approach to anyone who doesn't have his brains, guts, & determination.

I'd also recommend against an overly conservative SWR, too, but ***** has done a much better job of demonstrating the flaws in that approach than I ever could. Now that I think about it, he's also about to demonstrate the flaws in the high-SWR approach, too...

Quote:
Originally Posted by jdw_fire
I still believe the appropriate thing for any prospective retiree to do is to run FIRECalc with all of their numbers and weigh the risks for themselves.
Extreme SWRs-- both high & low-- require that the person who has to live with the consequences be able to sleep at night. They have to understand the issues and what FIRECalc or any other calculator is telling them-- and what it can never tell them. The answers may also change during ER as a person's situation changes.

That's why I object to "that's the final answer" insistence.
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Re: Help me design a portfolio that generates $50,000 a year
Old 05-28-2006, 10:35 PM   #39
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Re: Help me design a portfolio that generates $50,000 a year

Quote:
Originally Posted by Nords
Well, I think my only accomplishment so far has been getting trolled by someone who's put up 80-something posts on SWR since April Fool's Day.* Deja vu all over again.* But thanks anyway.
Ouch, it feels like I have been slapped.* What did I do wrong?

Quote:
Originally Posted by Nords
Can't argue with that ugly scenario, either.* Hmmm... dying in my cubicle... eating cat food... dying in my cubicle... eating cat food.* Tough choices.* I'm just not sure how we quantify which one is more painful or seems to last longer!
Is it likely someone will be eating cat food if
Quote:
Originally Posted by jdw_fire
said someone uses a reasonable approach to estimating their retirement expenses (something like Cut-Throat's) and then pays attention to their portfolio after retiring (i.e. reducing some of their discretionary expenses in bad years)
?


Quote:
Originally Posted by Nords
Extreme SWRs-- both high & low-- require that the person who has to live with the consequences be able to sleep at night.*
Extreme or otherwise sleeping is important.

Quote:
Originally Posted by Nords
They have to understand the issues and what FIRECalc or any other calculator is telling them-- and what it can never tell them.* The answers may also change during ER as a person's situation changes.
Absolutely!
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Re: Help me design a portfolio that generates $50,000 a year
Old 05-29-2006, 06:01 AM   #40
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Re: Help me design a portfolio that generates $50,000 a year

rodmail, I have tried to describe this several times, but maybe I need to give a more explicit example.

Planning using a feasibility tool in 2006 does not dictate your spending for the next 30 years.* If things go well, you adjust. If things go bad, you don't have to adjust if you don't want to.*

From a different thread:

Quote:
We usually talk about this in the situation when the portfolio goes way down -- and the whole purpose of the safe rate discussions is to give us some comfort that if we stop our paychecks early, we can reasonably count on at least 4% of the balance at that point for the next ~30 years.

But look at the positive side. Let's say that in 5 years, the portfolio is at 1.2 million, after starting at 1 million.

What has happened?

One thing that has happened is that we have "lucked out", as the scenario that is worst for the survival of a portfolio is a large and lengthy market decline starting immediately after we decide to begin the withdrawals. Except for that scenario, the rate would be a good bit higher.

Another thing that has happened is passage of time. So now, instead of needing a $1 million portfolio to last for 30 years, we need it to last for only 25 years.

We can take advantage of our good fortune (timing retirement when we don't have an immediate bear market afterwards) and our new circumstances (more money and a shorter time to spend it) in a couple of different ways.

One -- we can start over. Just designate this new moment as the start of the withdrawal program, and take 4% of 1.2 million, or $48,000 instead of $40,000, for the next 30 years (or you could take ~4.2%, since you are now looking at 25 years instead of 30...), or,

Two -- we can take a $200,000 "bonus" to get the portfolio back down to $1 million, and continue drawing 40,000 for 30 years (or 42,000 for 25 years).

(This seems counterintuitive, but all that is happening is that we are reducing the amount that would have been left over at the end of the 30 year period, since we didn't get the bear market in the first 5 years.)

So... 4% sets your minimum withdrawal even in bad times, but you can adjust upwards following good years.
I'm not sure why you feel we should be talking 4.65, to include Social Security, rather than 4%, the nominal SWR for a portfolio without outside cash infusions. While everyone agrees that the individual differences in our situations are important, it doesn't follow that those outside cash infusions should be averaged in when we are talking about the SWR of a portfolio in its withdrawal phase. We don't insist that everyone plan for a lifespan of the national average, why treat SS any differently? As far as I am aware, none of the dozens of SWR research papers or tools impute outside cash in their results - most don't even allow for it.

The issue of Social Security itself is not by any means universally accepted. The year I retired, Congress decided that full SS payments would not go to people at 65, but not until 67, by the time I reach that age. To Congress, it was a "safe" decision as it would not affect anyone they considered currently retired (i.e., over 65), and they built in a 10 year "safety zone" for people 55 and older.

Unfortunately for many who retired early, money they had perhaps counted on was just snatched away.

Congress could as easily decide this year that it will be 70, so my outside income will be at least 2 and could be 5 years later than I planned. With decades for political winds to change how SS works for many ERs before we can collect, most of us build our go/no-go plans based on what we think we can control, not on proceeds in 2020 of today's government programs, especially when those programs are in financial trouble and have had rule changes in the past few years.* (I say "think we can control" because there is no telling when the political winds might shift enough to start taxing portfolio assets as well as income.)

In any event, not everyone gets Social Security. Many state and local governments opted out on behalf of their employees. Any person who spent their career working overseas (except federal employees). The Amish (although I doubt they are big FIRECalc users anyway -- you kinda need electricity). Or the roughly 15% of FIRECalc users who are non-US residents.

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