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Jaye Jarrett Safe Withdrawal Study
Old 06-26-2002, 07:30 PM   #1
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Jaye Jarrett Safe Withdrawal Study

Texas-based financial planner Jaye Jarrett did an interesting study on how to allocate the fixed income portion of a retirement portfolio based on the 1926-1999 Ibottson data. The 12 page report is well worth reading

http://jjarrett.home.texas.net/resFi...omePortion.pdf

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Re: Jaye Jarrett Safe Withdrawal Study
Old 06-27-2002, 01:28 AM   #2
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Re: Jaye Jarrett Safe Withdrawal Study

The note at the end admonishing you to recheck your strategy at least once year is very sensible. In general, the conclusion that a low early withdrawal coupled with an "aggresive" strategy (I read as Small-Cap Value) produces the best results I think most of us know already. It also helps to start at the bottom of a bull market rather than the top of a bear . But then, market timing is a mug's game which is why we look for Safe Rates of Withdrawal and Minimum Rates of Withdrawal.
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Re: Jaye Jarrett Safe Withdrawal Study
Old 12-15-2002, 10:01 AM   #3
 
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Re: Jaye Jarrett Safe Withdrawal Study

:
I have Jaye C. Jarrett's information as well as the Trinity Study. All fine works. Their theory is applicable to the past and the longer this bear market lasts, the longer it will take to recoup ( for those who are still in it and did not see the signs in 1998 ).

I was lucky. I took my losses ( over 50 big ones ) and
have it in Vanguard's GNMA. Great income, secure
(yes, I heard about the Real Estate bubble) and instead
of making 19 % as in the go-go years, I'm happy with 7% - AND do not use more than 4 %.

It's tough out there. Good luck !
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Re: Jaye Jarrett Safe Withdrawal Study
Old 12-16-2002, 12:34 AM   #4
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Re: Jaye Jarrett Safe Withdrawal Study

I have a few friends (some retired and some still
working) that took tremendous hits in the recent
market downturn. We have all heard stories of people
either postponing retirement or going back to work
because of this. I personally know an 80 year old woman (not wealthy) who lost $150,000. I was
astonished to learn that she was still in stocks.

As far as "reviewing your strategy once a year",
I review mine every day. Compulsive? You bet!
It's paid off big time!
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Re: Jaye Jarrett Safe Withdrawal Study
Old 12-16-2002, 11:24 AM   #5
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Re: Jaye Jarrett Safe Withdrawal Study

80 might be a bit old to be heavily invested in the market, but for the average middle aged person, the market has had decent long term results. The ups and downs are normal for equities. If a person had just ignored the swings in the past, and kept to a reasonable target asset allocation, everything would have worked out in the long run.
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Re: Jaye Jarrett Safe Withdrawal Study
Old 12-16-2002, 12:11 PM   #6
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Re: Jaye Jarrett Safe Withdrawal Study

Well, I've said it before. I can put up with a low rate of return. I wouldn't like it, but I would still be able to make it to my demise. What I can't stand is losing any of my "base". I can't imagine any circumstances that could
lure me back into stocks.
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Re: Jaye Jarrett Safe Withdrawal Study
Old 12-16-2002, 12:43 PM   #7
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Re: Jaye Jarrett Safe Withdrawal Study

Quote:
80 might be a bit old to be heavily invested in the market
Unless it's your hobby. My mother-in-law has been actively investing for over 60 years and is still vitally interested in the market. The only reason we have cable is so she can watch CNBC when she's here. And she downloads her stock quotes every evening and pops them into her Excel program. Maybe that's why at 83 she is still zipping along.

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Re: Jaye Jarrett Safe Withdrawal Study
Old 12-17-2002, 02:31 AM   #8
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Re: Jaye Jarrett Safe Withdrawal Study

Hey, my 80 year old relative is the same way, i.e.
tracking her stocks, reading the WSJ, etc. Seems to enjoy it but losing $150,000 in one year in the market
makes for a pretty expensive hobby, it seems to me.

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Re: Jaye Jarrett Safe Withdrawal Study
Old 12-17-2002, 05:51 AM   #9
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Re: Jaye Jarrett Safe Withdrawal Study

Quote:
Hey, my 80 year old relative is the same way, i.e. tracking her stocks, reading the WSJ, etc. Seems to enjoy it but losing $150,000 in one year in the market makes for a pretty expensive hobby, it seems to me.
Couple of things - the main one - if she still has plenty to live on and having a good time - what the heck! She could have done the same thing at Vegas.

Two - depends on her cost basis. Many of my mother-in-law's stocks would have to "unsplit" many times before she incurred a loss. So yeah, she's loss some from not selling at the top, but she's still way ahead - and it's her money.

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Re: Jaye Jarrett Safe Withdrawal Study
Old 12-18-2002, 01:50 AM   #10
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Re: Jaye Jarrett Safe Withdrawal Study

Back to my 80 year old and her big losses in 2002.
She seemed pretty casual about it, but as far as I know
is not well to do. However, it would be a disaster for
me. Would be tempted to take a bath with my toaster .
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Depends on what she started with
Old 12-18-2002, 06:20 AM   #11
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Depends on what she started with

$200,000 to $150,000 is a disaster while $2,000,000 to $1,850,000 would have been beating the market. You would have to open my parents brokerage statements to know how much they are worth.
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Re: Jaye Jarrett Safe Withdrawal Study
Old 03-02-2003, 04:16 PM   #12
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Re: Jaye Jarrett Safe Withdrawal Study

The new March article for REHP has a comparison chart for survivability between Jarrett's and intercst's strategies.

http://rehphome.tripod.com/fixedinc.html

I've been busier reducing debt than planning withdrawal strategies so I'm gonig to have to read Jarrett's report a few times to understand the seemingly different allocation strategies. (Large vs. small cap and gov't bonds vs. corp bonds.)
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Sometimes you just get lucky
Old 03-02-2003, 06:45 PM   #13
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Sometimes you just get lucky

When I semiretired in 1993, I expected to work part time
indefinitely and to begin drawing on my IRA right away.
I drew my last paycheck in June, 1998 and have not
touched the IRA yet. I did have to cut back my lifestyle
relentlessly, but it was well worth it. People tell me all
the time "I wish I could retire." A lot of them could if
they were motivated enough. Doing it in the way that
most of us are doing it is unconventional to say the
least. A couple of times I received what I think is the
ultimate compliment in reference to my ER status.
People have told me "I wish I was you!" Imagine that!
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Re: Jaye Jarrett Safe Withdrawal Study
Old 04-25-2003, 02:50 PM   #14
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Re: Jaye Jarrett Safe Withdrawal Study

For another angle on maximum withdrawal rates go to the T. Rowe Price webpage. They have a calculator that doesn't use historical market behavior. Rather, it uses a series of simulations (off the top of my head I think 500 trials). You choose what allocations you want from about 4 or 5 possibilities, including all cash. The simulator then creates a set of returns, based on the historical means and variations about the means of your chosen asset class mix. But it doesn't depend in detail on any actual historical events.

The assumptions embedded in it are complex and important to understanding the results- but overall, the maximum allowed withdrawal rates are lower than anything I have seen before. They assume that withdrawals will escalate at 3% per year. Also, the only asset classes are stocks, bonds and cash instruments. (Nothing like timber, oil and gas, REITs, real estate, etc)

I did my best to force my actual likely allocations into their model, and got a disappointing maximum withdrawal, at 99% probability for 35 years, of..(drum roll)...2.63%!! I believe that for my comfort, since my SocSec will not be huge, and I have no pension, I need to plan on close to an infinite withdrawal period. I believe it is possible to be happy at almost any level of material consumption that is likely for us in the US, but I at least couldn’t be happy if I felt I were getting poorer every year.

Many of us remember how easy it was to get along when we were students, or first working, with very small incomes, even when adjusted for inflation. As time goes on, we upgrade a lot of things, and our lives get more expensive. Not necessarily better, but definitely more expensive! My goal now is to downgrade rationally, so I can plan on a gradual improvement over time at worst, and if things go very well, greater security and maybe even some rational resumption of upgrading.

Mike
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Re: Jaye Jarrett Safe Withdrawal Study
Old 04-25-2003, 09:52 PM   #15
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Re: Jaye Jarrett Safe Withdrawal Study

Someone here, maybe it was Ted, ran the same set of conditions through a bunch of different simulators and reported the results. T. Rowe Price's is brutal.
I find T. Rowe's calc. to be of limited benefit to my situation, as it does not include S.S., other pensions, etc.
It is not "Early Retirement" friendly.

As an example, live just on investments for some years, then have a small fixed pension start, then years later have S.S. start. Can't do it with their calculator.

I can try to use it, by estimating what my non-S.S. fund pull will need to be during S.S. applicable years. But that's a ways off in the future, and I would concurrently have to use my own estimation methods/guesses to get me from where I am now, to age 62, including what the annual returns would be in the interim. Then that would give me the fund $ to enter into T. Rowe. but running a simulator on only part seems senseless to me. In that respect, FIRECALC and ORP are more flexible for Early Retirees. ORP is at I-ORP.com if you have not tried it yet.

On the "lifestyle costs", I hear ya! Yesterday's luxuries became today's necessities. But one BIG difference between the college days and now is the whole medical and medical insurance hassle. The chances of needing major medical treatment as a student where slight (zero in my case). But as the years go on, the chances increase greatly. So far, I'm doing great! But... Have to be prepared for it, a major problem can make early retirement a disaster. Which means med. Ins. is a necessity. Not cheap, and will only go up. It is a major cost to be reckoned with as part of this ER idea. Something that one can't downgrade, to get by.
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Re: Jaye Jarrett Safe Withdrawal Study
Old 04-26-2003, 04:47 AM   #16
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Re: Jaye Jarrett Safe Withdrawal Study

Quote:
For another angle on maximum withdrawal rates go to the T. Rowe Price webpage. They have a calculator that doesn't use historical market behavior. Rather, it uses a series of simulations (off the top of my head I think 500 trials). You choose what allocations you want from about 4 or 5 possibilities, including all cash. The simulator then creates a set of returns, based on the historical means and variations about the means of your chosen asset class mix. But it doesn't depend in detail on any actual historical events.

The assumptions embedded in it are complex and important to understanding the results...

The assumptions that the designer of this sort of simulation must make are far beyond what I could attempt. They have to build in all the possible ranges of returns, inflation, interest, etc., and some system of rules about how they will interact. Then they have to build in some sort of randomization that is nevertheless realistic. There must be hundreds of separate rules, relationships, and limiting conditions.

If the designer has any qualms about leading people astray, then pessimistic assumptions will likely show up sprinkled throughout the design.

FIRECalc and the calculators at the REHP which use historical inforation are, in some ways, doing the same sort of simulation, but use the historical numbers instead of the randomized numbers.

Both types are trying to say "here's what could happen" (as contrasted to some other types of calculators, that attempt to say what will likely happen). The model using historical numbers has the luxury of saying, "we know these outcomes could happen, because they already have happened."

The T Rowe Price and similar models use the knowledge and insight of the design team to create plausible future market conditions, including conditions and trends that might be worse than we've ever seen.

Which one is better? Run both, and compare the results in 40 years!

Dory36
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Re: Jaye Jarrett Safe Withdrawal Study
Old 04-26-2003, 11:27 AM   #17
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Re: Jaye Jarrett Safe Withdrawal Study

In my opinion, FIRECalc is much better, despite its inherent limitations. *Its main advantage is that it measures the historical real rate of return on various classes of assets, by taking into account the inflation that occurred each year. (Although the measurement of inflation is admittedly imprecise, it certainly is a major consideration in financial planning.) *As best I can tell, the only way that the T.R. Price calculator accounts for inflation is to inflate the withdrawal amount that the user inputs by 3% per year. *There is no provision for using a different inflation rate, changing the withdrawal amount (in real dollars), or changing the amount invested. *So the TRP model makes the rather simplistic assumption that a person's retirement strategy will be to invest in a particular mix of assets, and withdraw an amount that increases by 3% per year until the assets are exhausted or the period of analysis ends. *(Like FIRECalc, it assumes that the asset mix is rebalanced annually.)

It is important to realize that the average annual returns and the standard deviations of each asset class that "drive" the T.R. Price model come from essentially the same data set as FIRECalc, except that the TRP model really doesn't make use of the historical data on annual inflation. *It would be possible to incorporate inflation into that model, but it would take rather sophisticated mathematics to do so properly, because inflation is highly correlated with returns on fixed income investments and stocks. *For a Monte Carlo simulation to work with fairly simple math (as I suspect the T.R. Price model does) the variables should not be correlated with each other. *

Also, the lack of inflation data in the T.R. Price model does not allow the performance of TIPs to be modelled the way that FIRECalc does (using historic inflation to indicate what the return on TIPs would have been if they had been available over that time period). *

Oh well, what should I expect for free? *
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Re: Jaye Jarrett Safe Withdrawal Study
Old 04-27-2003, 05:56 AM   #18
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Re: Jaye Jarrett Safe Withdrawal Study

A rather interesting feature of Monte Carlo simulation (of the type used by the T.Rowe Price asset drawdown model) is that it will give a different result each time that it is run, even if the input data is exactly the same. When each "run" of the model incorporates a large number of "trials" (like the 500 in the TRP model) the difference in the results will usually be sufficiently small to be of no practical significance.

However, if the model is run a very large number of times, say, one million, then there is a fair chance that the results of some "runs" will be substantially different.
For example, one of these "outlier" runs might indicate that a person could withdraw 15% of their assets for 30 years with a 95% chance of success. The person who made that "run" would be "unlucky" in the sense of receiving a non-representative result, but they would have no way of knowing that other than to run the model several times with the same input data and use the most consistent results.

Compared to the other uncertainties that are inherent in attempting to plan for the future, however, that one is minor!
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Re: Jaye Jarrett Safe Withdrawal Study
Old 04-28-2003, 10:53 PM   #19
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Re: Jaye Jarrett Safe Withdrawal Study

"A rather interesting feature of Monte Carlo simulation (of the type used by the T.Rowe Price asset drawdown model) is that it will give a different result each time that it is run, even if the input data is exactly the same."

Thank you for pointing this out. I suppose it is similar to the observation that as you continue to flip a fair coin, the %s of heads vs. tails will converge, but the absolute deviation of the totals will increase.

Mike
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Re: Jaye Jarrett Safe Withdrawal Study
Old 04-29-2003, 02:26 AM   #20
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Re: Jaye Jarrett Safe Withdrawal Study

I like FIREcalc a lot, but then I never tried any other
"safe withdrawal" projections, other than those I
could do with a pencil and the back of an envelope.
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