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Old 08-08-2008, 12:12 AM   #21
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First, I have not read Lucia's buckets stuff.

Second, I think this paper by Parker is destined to be one of those "classic" papers that get written up in the NYTimes, WSJ, Money magazine, Kiplinger's, Scott Burns, etc. It's algorithm will eventually be incorporated into FireCalc the same way that Bernicke's and Clyatt's methods are. Parker may even be able to write a book and make some money for himself that way, but his ideas are pretty darn simple.

These reason it's gonna be a classic is that he promises a 6% withdrawal rate most years and not a measly 4%. And he says he can do all this with a 2% expense ratio. His methodology appears to be just as valid as anybody else's. And while he's got an overall roughly 65:35 asset allocation like just about everybody else, he gives you an exact algorithm on what to do each year.

You can take that 2% expense ratio and do-it-yourself for 0.25%. If you like add the 1.75% e.r. reduction then to the 3% inflation rate. Or you can take that 6% and withdraw only 4% a year. Both these changes should give you even more confidence that it's gonna work out pretty well.
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Old 08-08-2008, 09:31 AM   #22
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I'm not impressed by the article. The strategy's complexity is a sign of weakness. They've added in little tweaks to overcome inadequacies in the basic strategy that testing it against historic data highlighted. This means the strategy is tuned to the historic dataset, rather than designed to cope with a generic unknown future.

Here's a simple strategy I've spent a whole half-hour developing, that will cope as well as can be expected with any possible future, and doesn't require you to presume you know anything about the mean, volatility or path of future returns.

Invest your money however you think prudent, and each year withdraw capital/n, where n is your life expectancy in years.

Note that life expectancy does not decrease by 1 each year. At 50 it might be 32, i.e. you expect to live to 82, but at 82 it might 8 (expected to live to 90) and at 90 it might be 4. (These numbers all made up, can't be bothered to look up correct values.)

I've done a crude Monte Carlo simulation of this in Excel, and it works pretty well. It does give unattractively low withdrawal rates at young ages, but that's probably prudent.
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Old 08-08-2008, 11:04 AM   #23
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Originally Posted by LOL! View Post
First, I have not read Lucia's buckets stuff.

Second, I think this paper by Parker is destined to be one of those "classic" papers that get written up in the NYTimes, WSJ, Money magazine, Kiplinger's, Scott Burns, etc. It's algorithm will eventually be incorporated into FireCalc the same way that Bernicke's and Clyatt's methods are. Parker may even be able to write a book and make some money for himself that way, but his ideas are pretty darn simple.

These reason it's gonna be a classic is that he promises a 6% withdrawal rate most years and not a measly 4%. And he says he can do all this with a 2% expense ratio. His methodology appears to be just as valid as anybody else's. And while he's got an overall roughly 65:35 asset allocation like just about everybody else, he gives you an exact algorithm on what to do each year.

You can take that 2% expense ratio and do-it-yourself for 0.25%. If you like add the 1.75% e.r. reduction then to the 3% inflation rate. Or you can take that 6% and withdraw only 4% a year. Both these changes should give you even more confidence that it's gonna work out pretty well.
LOL!,
I respectfully disagree. I think his approach is ad-hoc, and feel his validation is sloppy in 3 areas: a) He hasn't used actual CPI, b) he is using a 25 year horizon which is quite low for today's retiree especially an ER, and c) he hasn't tried to use any other technique to simulate more 25 year periods (bootstrap or monte-carlo).

This paper Decision Rules and Maximum Initial Withdrawal Rates
by Jonathan T. Guyton, CFP, and William J. Klinger


, also published by the FPA Journal, shows how to obtain a 6% initial withdrawal rate with a 95% chance of success and a 90% chance of maintaining purchasing power of the portfolio at the end of 40 years. This method uses portfolio and withdrawal rules (like forgoing an increase when the portfolio does badly or increasing withdrawals more than inflation when portfolio does well for a time).

I think that Guyton's method is also sort of arbitrary, but is more in line with what a lay person would do in response to their portfolio's performance. It also does not call for changes in asset allocation in response to market conditions.

The focus of research seems to have moved away from initial withdrawal rates and is more economics based with focus on a lifecycle model, consumption smoothing etc.

Full disclosure: I plan to use the method advocated by Bob Clyatt - the 4%/95% plan. I'm theoretically already using it, but am only in my first year of ER. IIRC, Bob is in his 8th year.
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Old 08-08-2008, 03:05 PM   #24
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Walkingwood, this is the kind of discussion I was hoping to see in this thread.

I read the Guyton paper(s) a while ago, so I will have to go back and revisit them. I remember being impressed with that paper as well.

As for not using actual CPI numbers, that doesn't bother me because one could pick any rate for inflation you wanted to (such as 3%) and different people have their own personal rate of inflation that depends on their spending pattern.

He clearly states why he used 25 years: because the data allows for that. As for not using a monte-carlo method, he has simply used the method used by FIRECalc as I understand it.

As for all the movement of $ among accounts ... that may be voodoo because once you have a 65% equities and 35% fixed income asset allocation and you spend and rebalance as you go along, then you pretty much have a 65:35 asset allocation. How you divvy up your buckets in your mind or in your actual accounts doesn't really matter. Nevertheless, the paper shows that a 65:35 asset allocation works.
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Old 08-09-2008, 12:04 PM   #25
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At 74, the thing I am beginning to fear most is leaving my wife Lyn, who goes glassy eyed on financial matters, with a complicated portfolio to manage.

Personally I am leaning toward investing my IRA totally in Wellesley with all distributions going to a money market holding 1 year of expenses. I am already
investing my taxable account in Wellington spiced up a little with Tax Managed
Small Cap and FTSE All World Ex-US. All distributions in the taxable go to a MM as well. My withdrawal strategy is spend my RMD out of the IRA MM account,
replenish the 1 year bucket as needed in UP years and never sell fund shares in a
DOWN year. I also hope to never sell fund shares in the taxable account. The
taxable MM is used for large expenses like new cars, vacations and emergencies.

Please excuse the hi-jack, but I just think the KISS method is better as we grow
older.

Cheers,

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Old 08-09-2008, 12:13 PM   #26
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Charlie, although I'm a little more than 10 years behind you I'm in complete agreement. I want to keep my investment strategy simple enough that it can be easily managed by my wife, who has little interest in things financial. At 62, I have 40% of our IRA's in Wellesley and will likely increase that amount over time.
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Old 08-09-2008, 12:17 PM   #27
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Sounds like a good plan Charlie.

I've tried to simplify our investments to the point where a page of instructions that explains what to do is sufficient.

Throw in the vanguard asset management services and she's good to go.

I've also given her the emails of a few people here just in case she gets stuck.
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Old 08-09-2008, 04:27 PM   #28
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Guys, isn't this attitude a bit demeaning to our spouses? After all, they were smart enough to rescue us from a lifetime of bachelorhood. And surely they're smart enough to figure out how to get along without us. So I suspect that, as much as it deflates our delicate egos, they've probably suckered us acquired the potential to manage their finances too.

Unless we're hiding something from our spouses, at some point our earnest financial-management explanations have convinced them that we've put together a system so simple that even a guy caveman could do it. Or else, after listening to us for a few minutes, they've decided that what we say is irrelevant-- no matter how sophisticated we think we are, after we're dead they're going to cash out and start over.

I keep the same paper-napkin explanation in our "If we wake up dead" file. Once in a while I'll show her a Quicken screen or a piechart. But she says she'll figure it out, and it's not as if I'll be around to kvetch kibitz care whether or not she's following my helpful suggestions.

I think she's planning to read the board for advice on annuities and whether she should pay off the mortgage...
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Old 08-09-2008, 06:00 PM   #29
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At 74, the thing I am beginning to fear most is leaving my wife Lyn, who goes glassy eyed on financial matters, with a complicated portfolio to manage.
Good point, and maybe folks a lot younger should be thinking about that, too. Wellesley seems like a good choice. Also interesting, if they prove themselves over the next 3-4 years, woud be the managed payout funds from Vanguard, especially the middle or income focused flavors. They would pay well (5-7%), self-annuitize a bit during bad years, and likely leave something nice for the heirs.
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Old 08-09-2008, 08:44 PM   #30
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Guys, isn't this attitude a bit demeaning to our spouses?
Nope. My wife has no interest in anything other than "Can I buy this?" and "Do we still have money?" (asked after we did the major renovations).

My answer: "we do until we dont!".

To be fair, I'd have very little luck intubating someone who wasnt breathing on their own, or adjusting their blood oxygen level.

Its not a burden I'd like her to have to take on shortly after my untimely demise.
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Old 08-09-2008, 08:54 PM   #31
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Guys, isn't this attitude a bit demeaning to our spouses? After all, they were smart enough to rescue us from a lifetime of bachelorhood. And surely they're smart enough to figure out how to get along without us. So I suspect that, as much as it deflates our delicate egos, they've probably suckered us acquired the potential to manage their finances too.

...
I'm with you, except for the 2nd sentence. That is about the only evidence that I have in almost thirty years of marriage that makes me question my wife's good judgement

She isn't really interested in our investments but she does have an MBA so I suspect that she'll figure it out if she needs to.

My mom didn't have a clue when my dad passed away but she was still working and she did have a couple of years to figure things out before she retired. Fifteen years later her church asked her to give a lecture to the church widows on money management.

MB
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Old 08-09-2008, 08:56 PM   #32
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To be fair, I'd have very little luck intubating someone who wasnt breathing on their own, or adjusting their blood oxygen level.
Its not a burden I'd like her to have to take on shortly after my untimely demise.
Well, that's my point. Hopefully all our investments can remain stable and on autopilot long enough for our smart widows to figure them out, or to institute their own system.

Hence there's no need for them to waste their time listening to our well-meaning tutorials, and no need for us to agonize over setting them up for failure.

And if we did have some sort of portfolio that we couldn't turn our backs on for a few weeks or months, what kind of Azanon a miserable life must that be?

When I tell my spouse how many gazillions up or down we are that week (of course with the caveat that it really doesn't mean anything until we sell), she just wants to know if we can still order pizza on Friday night...
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Old 08-09-2008, 09:00 PM   #33
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Oh our portfolio would do nicely on its own for 10 years.

Its the 9,000,000 people who would come out of the woodwork to help her with managing the money that are the problem.

It'd pretty much be the same situation as what happens when someone wins the lottery.
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Old 08-09-2008, 09:02 PM   #34
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It'd pretty much be the same situation as what happens when someone wins the lottery.
Yep. Losing you would definitely put her in that category.
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Old 08-09-2008, 09:14 PM   #35
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Oh ZING. You're on tonight!

Actually my instructions to her will effectively prevent her from running off with the pool boy to cabo san lucas. Well, for a couple of months anyhow.
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Old 08-09-2008, 09:51 PM   #36
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Actually my instructions to her will effectively prevent her from running off with the pool boy to cabo san lucas. Well, for a couple of months anyhow.
As far as you know. You'll be dead, remember? And she'll be pulling down her own pension someday, right?

Last week my spouse was watching a PBS documentary on longevity. One of the study groups was a bunch of Ashkenazi Jews who all grew up in the same neighborhood of the Bronx. (As my father-in-law says, if you don't know that the Bronx has more than one neighborhood then you don't know the Bronx.) All of them were in their 11th decade and they all looked like they were 75 years old-- 80 tops. Many of them still had full heads of their own hair.

It turns out that they're all her distant aunties & uncles. So my spouse plans to wear out more than one pool boy after I'm gone, and we don't even have a pool.
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Old 08-10-2008, 09:41 AM   #37
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Neither do we. Which is pretty suspicious if you ask me.
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Old 08-10-2008, 10:39 AM   #38
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Do not dis Mr. Mom. I stayed home with our daughter after she was born - eventually nat'l merit scholar, 3.9 gpa in college, and now in law school. All due to my skilled early care . Or as I told my friends it's just like raising a puppy - keep food in front and clean up after. I bet I can still do cloth diapers faster than anyone on this board.
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Old 08-10-2008, 10:42 AM   #39
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I think its time to change the signature. I've feigned dismay long enough
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Old 08-10-2008, 10:45 AM   #40
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If I recall correctly, Guytons paper used a 1973-2000? time period. Finding higher withdrawals is easier when going from a low market through the biggest bull ever. If you had money to start, is was all good thereafter.



The more comlicated the scheme, the less believable it is.
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