Humberto Cruz on variable withdrawal rates

[cute fuzzy bunny]

Nice beaver, Al.

ROFLLLLLLL

I think we're overanalyzing. Eat, drink, be merry.

Note I said "merry", not "mary".

[ESRBob]

Quote:

Originally Posted by Zipper It's pretty simple really. Let's say the nest egg is $500 000. On 12 31 you set the bar for the next year at 5% or $25 000. A year later, after the markets have gone nuts, the stash is worth $600 000. You take 5% or $30 000. But oh! oh! The market has a major dump the next year, and after your 5% was deducted, your balance is only $400 000! You then proceed to take only 5% for the following year or $20 000. If you have a balanced portfolio, the fluctuations will still be there but staying the course means your ups and downs will be within reason. Your base, SS or CPP/OAS is a guaranteed safety net. The 5% keeps you from pigging out in the good times and panicking in the bad times.

The 95% Rule would liet you spend 95% of 30k in that third year, or 28.5k. It is a lot better than having to drop from 30k to 20k in a year. If markets were still down the second year, you would spend 95% of 28.5k, or $27,070.

Turns out this works historically with very little price to pay in terms of survival rates or SWR. Even in a rough time like 1965-1995, it only 'bit' during 6 years, and the portfolio survived and thrived back to its original levels and indeed 50% above the original real value by 1994.

On the other hand, the normal 4% SWR inflation-adjusted annually etc. ended up with portfolio values about 1/3 as high, while the 5% crashed and burned at every bond/equity blend. (This from the graphs on Bernstein's Intelligent Asset Allcocator, Pages 171-172.

True you get less to spend during those years of high inflation, or years when the markets are sour, but you could tighten your belt or get a bit of part-time work to make ends meet. This would be well worth it if you thereby gained high confidence that your whole portfolio and ER or Retirement plans weren't at risk of flat-lining inside of 25 years, the way the traditional method did for the retiree class of 1965. I don't iknow about you all, but that is the only thing that used to give me shivers about ER. The 4%+ ( 5% seems a bit high based on my research) straight percent withdrawal method, made more livable by the 95% Rule, goes a long way toward fixing that by pushing you to make lots of little adjustments along the way each year when they feel natural and are not so painful.

[JPatrick]

Ok I understand the variable WR concept.
What I need now is a calculator that will factor in
portfolio growth- effect of inflation on portfolio.

I want to compute a VWR of 2% with assumed return of 6% and assumed inflation of 3%

Where can I find that?

[Nords]

Quote:

Originally Posted by JPatrick I want to compute a VWR of 2% with assumed return of 6% and assumed inflation of 3%

6%-3% = 3% after inflation (before taxes).

Now take out 2% of (portfoliox1.03).

[JPatrick]

Quote:

Originally Posted by Nords 6%-3% = 3% after inflation (before taxes). Now take out 2% of (portfoliox1.03).

Hey Nords, that's the hard way.* I need 40 years worth of data. I was hoping for one of those lazy boy enter the info and push enter calculators.
Wow this ER sure is hard.* Maybe I'll just divide it up into 40 piles for 40 years. With any luck the government will find a way to compute inflation so there ain't none. That would save a lot of work.
Thanks

[sgeeeee]

Quote:

Originally Posted by JPatrick Ok I understand the variable WR concept. What I need now is a calculator that will factor in portfolio growth- effect of inflation on portfolio. I want to compute a VWR of 2% with assumed return of 6% and assumed inflation of 3% Where can I find that?

If I understand you, you want to simulate what the variable withdrawal would do to you over time. You can use FIRECALC to look at this. Just set your withdrawal rate to zero and use the expense ratio to reflect the actual expense ratio plus your variable withdrawal rate.

Now comes the tedious part. . . You have to run the detailed simulation then cut and past the results into a spreadsheet. Then you can use the maximum and minimum function to identify the highest and lowest portfolio values. Your highest and lowest historical withdrawals would simply be your variable withdrawal rate times the portfolio value.

[sgeeeee]

Heres the original posting that looks at the effect of mixing the conventional inflation adjusted SWR with the variable SWR. You don't have to look on intrcst's board if you don't want to:

http://early-retirement.org/forums/i...p?topic=2048.0

My personal withdrawal strategy has been to spend money when I want to. But I always check the result against the more idealized models.

The simulations described in the link above were an attempt to examine the spending model that a number of posters seemed to be describing. They have a basic budget that they don't want to compromise on and a more discretionary budget that they could do without if the option were to go back to work. The simulations do not account for the impact of following the advice of a stuffed beaver.

[RatherBeFishn]

Has anyone read the Paul Merriman book Humberto Cruz also recommended in this article? Live it Up without Outliving Your Money! : 10 Steps to a Perfect Retirement Portfolio

Comments on the book?

[Patrick]

Quote:

Originally Posted by ESRBob When we modelled this with 75+ years of historical data, the results were encouraging -- it shaved maybe 2/10s of a percent off the Safe Withdrawal Rate.* Success rates dropped a few percent in some cases, no change in others.

ESRBob, what did you use to do the modelling? Can I buy the program somewhere?

Thanks,

Patrick