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Old 08-10-2008, 10:52 AM   #41
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To be fair, the data firecalc and many other calculators uses is similarly flawed. It starts back in the 1870's, right after the civil war was over and really one of the worst times from an economy standpoint and investment price standpoint. It was pretty much all upside from there.

Well made point. Most of the "historical data" is moot. The two bad times are the depression era and the 64-74 time period. If your plan makes it through those, you're good. If it doesnt, then your plan wont survive a serious financial crisis.

And we'll have one. Sooner or later.
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Old 08-10-2008, 11:35 AM   #42
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My simple plan, that my wife an continue to use -

Divide after tax fixed pensions and mixed portfolios annually over IRS life expectancy.
Spend up to the lesser of the new division or the previoue annual division plus inflation.
Portfolio balance in excess of spending is used as a reserve for large purchases and emergencies.

Inflation adjusted if portfolio makes it so, reacts to valuation changes, can set cash flow match withdrawals or use a higher equity portfolio if desired, more consistent with out of sample non-US history.
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Old 08-10-2008, 11:41 AM   #43
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I still contend that [Net assets in withdrawal year]/[years of life expectancy in withdrawal year] is better than all these other complicated schemes.

One refinement I would make is to say the above is the absolute limit on what you may spend, but there should be a second softer barrier, the amount you need to live reasonably comfortably. In any year where the hard barrier is above the soft, it then becomes a matter to be judged at the time whether to let a surplus build up as a safety reserve or spend the some of the difference on one-off items.

Adopting the refinement helps iron out one weakness, that at very old ages (mid-nineties) income tended to drop below the long term average.

An additional refinement that also works to iron out that problem is to introduce the effect of putting the assets inside a fair annuity. By "fair annuity" I mean a theoretical one where the provider makes no profit and charges nothing for administration, and at the end of each year each suriving annuitant gets a mortality bonus consisting of his probability of dying in that year multiplied by his average daily investment account balance. According to my data, income from mortality bonuses on their own will exceed the hard withdrawal limit from age 89 for a man, meaning effectively no capital run-down thereafter. (Surely their must be enough retired lawyers and computer programmers on this board to set up an on-line mutual company to provide this idealised annuity?)

The last refinement, which I really don't like because it is ad hoc and inelegant, but which does seem to work well, is to reduce the denominator (life expectancy) by a fixed percentage in calculating the hard barrier. The percentage is found by using Excel Solver to minimise variation in income over the years. This has the effect of moving some of the income from later years to earlier years, which mitigates the low incomes this strategy can produce in the very early years, if the retiree is very young.
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Old 08-10-2008, 10:28 PM   #44
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Originally Posted by rmark View Post
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.
The first Guyton paper used 1973-2004. The one I mentioned uses 1928-2004. It also uses a "stochastic approach" (Monte-Carlo).

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I still contend that [Net assets in withdrawal year]/[years of life expectancy in withdrawal year] is better than all these other complicated schemes.
Do you have a table that shows how this would work out for an ER -say someone retiring in late 40s / early 50s with a $1M portfolio? It would be helpful to see that the percentages start out being. Thank you.
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Old 08-11-2008, 07:17 AM   #45
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Do you have a table that shows how this would work out for an ER -say someone retiring in late 40s / early 50s with a $1M portfolio? It would be helpful to see that the percentages start out being. Thank you.
According to this table

Actuarial Life Table

life expectancy at 50 for a male is 28.46 years, so $1M/28.46 gives an income of $35,137. i.e. a 3.5% withdrawal rate.
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Old 08-11-2008, 08:39 AM   #46
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I still contend that [Net assets in withdrawal year]/[years of life expectancy in withdrawal year] is better than all these other complicated schemes.
I take it back, I don't like this strategy any more. Looking at the curve of incomes produced with volatility removed and returns in a sensible range, the curve produced by the basic principle is to far from flat. The number of refinements required to fix this are to many.
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