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Old 07-29-2015, 07:34 PM   #21
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Kitces: How the 4% rule has held up since 2000 & 2008
Old 07-29-2015, 08:47 PM   #22
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Kitces: How the 4% rule has held up since 2000 & 2008

This look at a variety of portfolios withdrawing the classic 4% should be comforting

http://www.retireearlyhomepage.com/reallife15.html

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Looking back over the past twenty years, I thought it might be interesting to see how some popular investment strategies have fared since I quit work in November 1994...
The good news is that anyone with a reasonably diversified portfolio did just fine. It's not bad news, but, of course, some strategies performed better than others...
[the article]shows the results for a $100,000 starting balance and a 4% of assets initial withdrawal indexed annually for inflation. Vanguard index funds are used whenever possible in this analysis.

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Old 07-29-2015, 10:08 PM   #23
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His conclusion should (but probably won't - worriers are gonna worry) reduce the "financial anxiety" expressed so often on this forum:
It helped this worrier
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Old 07-29-2015, 11:23 PM   #24
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I don't think 60/40 is too conservative for a year 2000 early retiree. That's where I started. I was running around 58/42 by mid 2000s and by 2009 55/45 was more comfortable. I'm not much below that now.
I struggle with this. I've read reducing equity exposure at retirement, even without using a rising glide path, helps to reduce sequence of returns impact. Were you at all concerned with SOR, and if not, why not? Also, can you explain your reasoning behind feeling 60/40 isn't too conservative for someone in retirement? I ask because I'm at 40/60 having just retired and whether I raise that ratio will depend a lot on what the PF looks like in say, 5 or 10 years.

Just interested in your thinking in order to perhaps educate mine.
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Old 07-30-2015, 01:41 AM   #25
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This look at a variety of portfolios withdrawing the classic 4% should be comforting

2014 Update: Real-Life Retiree Investment Returns




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Yes it was nice to see intrcast is still updating the site, 20 years later.

He pointed out that the Harry Brown permanent portfolio, which appeared to be doing great was actually only doing well because of a spreadsheet area. It does lead one to question how many other spreadsheet and logic errors are out in financial planning. God knows I've made my share.

It also goes to show that when you retire is almost as important as how much, 1994 was a pretty good year. Modest inflation and right before the start of great bull run.
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Old 07-30-2015, 05:20 AM   #26
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I struggle with this. I've read reducing equity exposure at retirement, even without using a rising glide path, helps to reduce sequence of returns impact. Were you at all concerned with SOR, and if not, why not? Also, can you explain your reasoning behind feeling 60/40 isn't too conservative for someone in retirement? I ask because I'm at 40/60 having just retired and whether I raise that ratio will depend a lot on what the PF looks like in say, 5 or 10 years.



Just interested in your thinking in order to perhaps educate mine.

Well if you base the decision on firecalc scenarios the answer is higher equity AA, something more like 75% equity does better. You have two different enemies, inflation that equities fight and loss of principal that bonds avoid. Why many go to more bonds in AA is they conclude they have already won the game, either due to size of portfolio or inflation adjusted pensions and don't see reason for the additional equity risk. So to your question do you have inflation adjusted pension or SS, or a small SWR need, then your decision seems fine.


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Old 07-30-2015, 05:34 AM   #27
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Well if you base the decision on firecalc scenarios the answer is higher equity AA, something more like 75% equity does better.
Actually, FIRECalc says there isn't much improvement once you get to an equity allocation of 40%:
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Old 07-30-2015, 06:22 AM   #28
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Actually, FIRECalc says there isn't much improvement once you get to an equity allocation of 40%:
That agrees with what I've seen before with lower SWR's (including my own backtests). As you increase the withdrawal rate, you get a dropoff at both ends.
Safe Withdrawal Rates for Retirement & the Trinity Study - Forbes
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Old 07-30-2015, 06:47 AM   #29
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I struggle with this. I've read reducing equity exposure at retirement, even without using a rising glide path, helps to reduce sequence of returns impact. Were you at all concerned with SOR, and if not, why not? Also, can you explain your reasoning behind feeling 60/40 isn't too conservative for someone in retirement? I ask because I'm at 40/60 having just retired and whether I raise that ratio will depend a lot on what the PF looks like in say, 5 or 10 years.

Just interested in your thinking in order to perhaps educate mine.
I retired in 1999 - we know what the market looked like then.

I would never have been comfortable with 75% equities, especially in 1999. In looking at the studies, 60% equities had as good a survivability yet with considerably less volatility. 75% equities is sometimes recommended, as the terminal amount is likely to be higher, but I was more interested in dampening the roller coaster ride there. At the same time I knew that long term inflation was the bigger threat for an expected lengthy retirement, so I didn't want to go too low in equities at the beginning.

Yes, I was concerned with sequence of returns, but 40% fixed income seemed like a pretty good hedge. Whereas 25% not so much.

I doubt I'll go below 50% equities until I reach my 70s.

I'm confused - you are at 40% equities but asking me why I don't think 60% is too conservative for an early retiree?
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Old 07-30-2015, 06:59 AM   #30
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Actually, FIRECalc says there isn't much improvement once you get to an equity allocation of 40%:
While that is true at 30 years at 40 years cFireSim shows an increase from 75% at 60/40 to 82% at 75/25, and Firecalc has similar numbers. I don't think 30 years is long enough for somebody retiring before 55.

How do you include a Firecalc result in a post? I know I've done before but everything wasn't working.
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Old 07-30-2015, 07:08 AM   #31
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...

I'm confused - you are at 40% equities but asking me why I don't think 60% is too conservative for an early retiree?
I meant that I've wondered myself if my 40% equities allocation wasn't too conservative (although I have seen the chart and recommendations that between 40/60% and something like 60/40% on the high end is the AA sweet spot). So I wanted to understand why you thought your higher 60% equity allocation wasn't too conservative.

I will probably stay at 40/60 for at least the next 5 years as it represents my SWAN PF. If the equity portion dropped by 50% in a crash, I could live with that until they recovered. It reduces anxiety around market activity now that I'm retired.

I've also found that I inadvertently greatly reduced anxiety around having just retired by "accidentally" working one more year: I retired 5 months later than planned at the request of my boss, then used $ earmarked for something else no longer needed to fund the rest of the year. I'm keenly aware of the SWAN factor when it comes to finances, so acting in the manner I have has worked for me (not to say I won't increase equity allocation in the future based on PF performance).
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Old 07-30-2015, 07:34 AM   #32
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I meant that I've wondered myself if my 40% equities allocation wasn't too conservative (although I have seen the chart and recommendations that between 40/60% and something like 60/40% on the high end is the AA sweet spot). So I wanted to understand why you thought your higher 60% equity allocation wasn't too conservative.

I will probably stay at 40/60 for at least the next 5 years as it represents my SWAN PF. If the equity portion dropped by 50% in a crash, I could live with that until they recovered. It reduces anxiety around market activity now that I'm retired.

I've also found that I inadvertently greatly reduced anxiety around having just retired by "accidentally" working one more year: I retired 5 months later than planned at the request of my boss, then used $ earmarked for something else no longer needed to fund the rest of the year. I'm keenly aware of the SWAN factor when it comes to finances, so acting in the manner I have has worked for me (not to say I won't increase equity allocation in the future based on PF performance).
Personally I wouldn't be comfortable with early retirement with only 40% equities. I think the sweet spot really starts closer 45%, and that's for a 30 year retirement so is more appropriate for someone retiring at 65.

But if you start at 40% and allow your equity allocation to gradually rise, spending more down from your fixed income - that should be OK.
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Old 07-30-2015, 08:13 AM   #33
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Not only do three of the four "failures" occur beyond 30 years, the one failure within thirty years (#4 above, ending in 2002), last 29 years! In truth, this data tends to encourage optimism, not concern, about the 4% withdrawal rate. Unless the retiree concerned retired at age 32, SS would be available as a backup in the above scenario.
Separately, Firecalc always seems to provide more favorable numbers than Cfiresim. Wanting to err on the side of caution, I tend to view the data as more reliable if it comes from the more pessimistic, rather than the more optimistic calculator.
The 1973 failure cycle also starts showing signs of stress so quickly, that I'd like to think most people would take precautions to keep it from failing. Because of inflation, and the turbulent economy, what started off as a 4% withdrawal rate in 1973 is suddenly 10.2% by 1979!

I used the figures of $40K per year, and $1M invested, to start off. By 1979, inflation has brought that $40K up to $73,051, while the $1M had been eroded to $713,921.

And, that's not just a one-year aberration. It goes to 11.2% for 1980, and 13.3% for 1982. By 1987, it's back down to 11.7%. By this time, the withdrawal amount is $108639, and the remaining balance is at $931,973. Almost back to $1M, but in much-less valuable 1987 dollars.

From there, the withdrawal rate goes up quickly. For 1994 it comes to 22.3%, and by the end of 2001 there's only ~$32K left. The 2002 withdrawal is ~$170K, so that puts an end to it really quickly.

If this had been me in the above scenario, I would hope I would have had the foresight to cut back on spending fairly early on, take a part time job, or both! Still, even in this scenario, when you consider the withdrawal rate went above 10% way back in 1979, yet it held on through the end of 2001, it looks to me like the 4% SWR still put up a valiant fight.
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Old 07-30-2015, 09:08 AM   #34
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FWIW - retiring next year at 50, with a 60/40 portfolio and 3% WR. I don't anticipate getting more conservative than that, and may opt to follow rising equity percentage if things look good after a few years.
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Old 07-30-2015, 10:26 AM   #35
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Thank you OP.
I've been getting tired of reading the Pfau and Schiller PE10 "This time it's different" SWR=2.x% postings.
It's to late, I already retired! I'm not going back to do another 20 years to get to a 2% WR.
So despite my super high WR, with SS coming on line in 14 years I'm feeling better after reading the linked article.
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Old 07-30-2015, 11:10 AM   #36
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Personally I wouldn't be comfortable with early retirement with only 40% equities. I think the sweet spot really starts closer 45%, and that's for a 30 year retirement so is more appropriate for someone retiring at 65.

But if you start at 40% and allow your equity allocation to gradually rise, spending more down from your fixed income - that should be OK.
Confession: it's not really early retirement in that technically including the OMY I retired at 61. The 40% still works by all calculations (although it probably makes my retirement more expensive, a compromise I'm willing to make for personal peace of mind).

Admittedly, however, increasing to 45-50% in 5 years depending on market is a good idea, so I'm definitely strongly considering it. Thanks for your thoughts!
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Old 07-30-2015, 11:10 AM   #37
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Thank you OP.
I've been getting tired of reading the Pfau and Schiller PE10 "This time it's different" SWR=2.x% postings.
It's to late, I already retired! I'm not going back to do another 20 years to get to a 2% WR.
So despite my super high WR, with SS coming on line in 14 years I'm feeling better after reading the linked article.
Emphasis added

+1 and well said.
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Old 07-30-2015, 11:24 AM   #38
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Thank you OP.
I've been getting tired of reading the Pfau and Schiller PE10 "This time it's different" SWR=2.x% postings.
It's to late, I already retired! I'm not going back to do another 20 years to get to a 2% WR.
So despite my super high WR, with SS coming on line in 14 years I'm feeling better after reading the linked article.
It's good to feel better about how an unknown future will treat you! But the fact is, it is an unknown, the past may not predict the future and only living through the times will reveal the actual outcome.

Pfau/Schiller may be correct. Or Kitice's more optimistic outlook may be correct. Or the future may be something entirely different from any of our expectations. That's the way life is.

I'm glad you're feeling better! But stay flexible, especially about alternatives to supporting yourself if historical based projections for financial holdings take an expected path.
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Old 07-30-2015, 12:08 PM   #39
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Pfau is selling something... I read his stuff with interest, but take it with a grain of salt.
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Old 07-30-2015, 12:12 PM   #40
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Pfau is selling something... I read his stuff with interest, but take it with a grain of salt.
Everybody is selling something. There are no guru's with the "one" correct answer. Take all authors with a grain of salt.

The exception to the above might be gov't reports on historical and current performance of economic factors. Or articles based on those reports where the reader has a firm grip on the data being used and the statistical tools being used to analyze it.

And even gov't reports which seem to be strictly quantitative statements of the facts can be loaded with bias meant to influence the public/voters. Inflation calculation methodologies come to mind.........

Guru-seekers, beware!
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