Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Old 11-19-2016, 02:36 PM   #161
Administrator
W2R's Avatar
 
Join Date: Jan 2007
Location: New Orleans
Posts: 37,675
Quote:
Originally Posted by audreyh1 View Post
For my purposes I need to know what will happen each of the intervening years, because that lets me know how low the portfolio might go in real terms, and that impacts my income during those intervening years. That's what I might have to live with.

How low might my income shrink is shown in the table above. In the event that we hit a 1966 type scenario, I needed to know that my income might drop below 70% from where I started, for 11 years in a row, within that run below 60% for 3 years in a row, and as low as 54% one of those years. The portfolio doesn't drop more than half in real terms, which is a good thing, nevertheless you are looking at 16 years of shrinking real income, and you had better be prepared to deal with that.

Once recovery starts - hurrah! But you gotta get past those initial years first.
Right now, we have been experiencing an extended "hurrah!" situation. Still, my guess is that many of us are holding back in our spending nevertheless. Seriously, look at this graph of the Dow versus time for the past 10 years, that I got from the internet. A graph of the S&P looks fairly similar. Makes me want to break loose and utter a resounding



~~WHEEE!!!!~~



How many of us are truly relishing, enjoying, and taking advantage of the financial freedom that this graph is illustrating? I think that the present is a time we should remember for many, many years. Are we all spending a little more this year than we did in 2009? I hope that we are taking a break from our incessant preparations for the next recession in order to do so. It is wonderful to be as fully aware and in touch with the "up years" as we are with the "down years" that inevitably follow.


Attached Images
File Type: jpg Capture.JPG (17.8 KB, 41 views)
__________________

__________________
Fairy tales are more than true: not because they tell us that dragons exist, but because they tell us that dragons can be beaten.

― N. Gaiman (2002)








W2R is online now   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 11-19-2016, 02:41 PM   #162
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 14,976
Quote:
Originally Posted by W2R View Post
.....
~~WHEEE!!!!~~
....
OMG!!! She did it again! We are doomed!
__________________

__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
pb4uski is online now   Reply With Quote
Old 11-19-2016, 02:46 PM   #163
Administrator
W2R's Avatar
 
Join Date: Jan 2007
Location: New Orleans
Posts: 37,675
Quote:
Originally Posted by pb4uski View Post
OMG!!! She did it again! We are doomed!
If I do it often enough, eventually it will happen, right?
__________________
Fairy tales are more than true: not because they tell us that dragons exist, but because they tell us that dragons can be beaten.

― N. Gaiman (2002)








W2R is online now   Reply With Quote
Old 11-19-2016, 04:07 PM   #164
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2004
Posts: 11,527
Quote:
Originally Posted by NW-Bound View Post
You have $1M to start out with. It stays constant (in 1966 terms).

You keep spending 3% a year, again in 1966 terms. So, in 10 years, you spend 30%, and so forth. In 17 years, you spend 3 x 17 = 51%. No matter what the nominal value is, your portfolio has shrunken to 1/2 of its original purchasing power.
Assuming a person would blindly take the same dollar amount out of their portfolio while it has no gains for 17 years. If, instead, our retiree takes 3% out of the year-end balance for 17 years of no-growth, he would >not< be down to 49% of his starting portfolio, he'd be down to 60% (or, to put it more appropriate term, it is now 20% larger). Yes, his annual withdrawals would have gradually decreased in size by 40%, but he's had almost 2 decades to accommodate that decrease in available spending, as it happened at 3% each year.
__________________
"Freedom begins when you tell Mrs. Grundy to go fly a kite." - R. Heinlein
samclem is offline   Reply With Quote
Old 11-19-2016, 04:17 PM   #165
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
NW-Bound's Avatar
 
Join Date: Jul 2008
Posts: 18,654
What you describe is most likely to happen in real life. I was describing how a constant $ WR would deplete a portfolio in those stagflation years.

But even if a person does not or cannot reduce his spending, is it really that bad, spending down 1/2 of your stash in 17 years, or depleting it in 33 years? I guess if you live to 100, it is of a concern, but most people do not last that long.

I think the prospect of low returns in the coming years is of more importance to the really young ER who quit work in the 40s. And for those who are still accumulating, it may break their heart to hear that it may take longer for them to reach their dream.

PS. Here's an old thread about Shiller telling people to live like a student in order to save for retirement: Shiller: Live Like a Student and Save.
__________________
"Old age is the most unexpected of all things that can happen to a man" -- Leon Trotsky
NW-Bound is offline   Reply With Quote
Old 11-19-2016, 05:43 PM   #166
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2004
Posts: 11,527
Quote:
Originally Posted by NW-Bound View Post
But even if a person does not or cannot reduce his spending, is it really that bad, spending down 1/2 of your stash in 17 years, or depleting it in 33 years? I guess if you live to 100, it is of a concern, but most people do not last that long.
Speaking only for myself, yes it would really be that bad.
1) It is all well and good to look, retrospectively, at a series like Audrey posted and say we could wait until our portfolio returns to normal. Real life isn't like that--we don't know for sure it will ever go back up. Frankly, after 15 years of flat returns I'd be very concerned (along with every news show and economist that would be bombarding us with commentary) that something was structurally very different and very broken. It would be very small comfort that the US, in a totally different set of circumstances, had recovered from bad times. Some countries haven't.
2) Very few of us know how long we'll live (and how long our money will need to last). Is 75 old? Half of 75 year olds will live another decade, and about 10% will live another 20 years. Ya gotta plan for that.
__________________
"Freedom begins when you tell Mrs. Grundy to go fly a kite." - R. Heinlein
samclem is offline   Reply With Quote
Old 11-19-2016, 05:53 PM   #167
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
NW-Bound's Avatar
 
Join Date: Jul 2008
Posts: 18,654
You could be right, in that when I myself get to 75 which is a mere 15 years from now, I would look at my stash being shrunken to 1/2 and be worried and not thinking the same as I do now. 75 is really not that old (we do have quite a few geezers here at that age, don't we?).

I dunno. I still think that even if I last longer into the 80s, I may be in bad enough shape that I won't care a diddly squat about my stocks or bonds. I would worry more about losing my mobility and becoming bedridden.

But one way or the other, it is not easy to die broke. Most posters here on this forum will either die earlier than they plan, or run out of things to spend money on simply because they are afraid of dying broke. The ones dying broke will do so whether they die at 60 or 90.
__________________
"Old age is the most unexpected of all things that can happen to a man" -- Leon Trotsky
NW-Bound is offline   Reply With Quote
Old 11-20-2016, 10:04 AM   #168
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 15,116
Quote:
Originally Posted by samclem View Post
Assuming a person would blindly take the same dollar amount out of their portfolio while it has no gains for 17 years. If, instead, our retiree takes 3% out of the year-end balance for 17 years of no-growth, he would >not< be down to 49% of his starting portfolio, he'd be down to 60% (or, to put it more appropriate term, it is now 20% larger). Yes, his annual withdrawals would have gradually decreased in size by 40%, but he's had almost 2 decades to accommodate that decrease in available spending, as it happened at 3% each year.
Those are great comparisons - both time for dealing with shrinking income and
the fact that the portfolio hasn't depleted as quickly. This is the tradeoff a retiree makes when they choose one method over another.

One thing I like about using the % of remaining portfolio method, is that if a period starts with several good years, with the portfolio growing faster than inflation, one gets to have increasing income in the early years of retirement precisely when it might be much more fun to use that extra income as one is generally younger, healthier and more active.

But to use this method, one must have a lot of discretionary spending that could be cut out of the annual budget if needed during years when the portfolio shrinks. And while its true that in general one might only deal with such a situation for one or two years in a row before recovery, there could be periods where income gradually shrinks (in real terms) for many years in a row.

In my case, the income from the portfolio has been growing faster than our natural spending, so it's been easy to set aside unspent funds for possible needs in the near future, insulated from market volatility. It's something I had planned to do anyway, thinking of it as a form of "income smoothing" to counteract the volatility in annual income from a method tied to annual portfolio value. I also know any year now there could be a drastic drop in the portfolio value, and I have to deal with reduced income. After a year like 2008 income could drop by 30%!

Conversely, with the inflation adjusted SWR method, real income stays constant during the good years the portfolio increases, meaning the portfolio grows during those years which provides protection for future years of a bad market fun. That's fine too, it's just a different approach and a good one if someone has a lot of fixed expenses and not much flexibility or has difficulty dealing the the concept of annual income dropping suddenly in the future.

And I certainly understand why the Clyatt 95% rule would be an appealing tradeoff as it provides a form of income smoothing to deal with down years, and it has been well studied. I haven't adopted it purely for simplicity reasons, as I feel like I can handle the more drastic drops in annual income if/when they occur. I suppose I think I would feel more financially secure with accepting a drastic drop in income up front after a bad year, rather than ratcheting down using a 95% rule. It's all a matter of personal taste and psychology.
__________________
Well, I thought I was retired. But it seems that now I'm working as a travel agent instead!
audreyh1 is offline   Reply With Quote
Old 11-20-2016, 11:27 AM   #169
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
NW-Bound's Avatar
 
Join Date: Jul 2008
Posts: 18,654
During the period of 1966-1983 where both stocks and bonds gave no returns over the course of 17 years (-1% cumulative for stocks, +3% cumulative for 3-month T-bill, and -24% for 10-year bonds), whatever one spent came out of his principal. The more he spent, the faster he depleted his stash.

When one is eating his seed corn for 17 years, it can't feel very good. The only way to conserve your corn is to eat less. One feels like a squirrel eating his stash of nuts for a long winter of 17 years.


PS. One positive thing that comes from not retiring very early is that our SS benefit is higher, and we can live OK on that if we take it at FRA or later.

SS may be cut, but as we should not be depleting our own stash and still have it to supplement SS, we will do OK. I just will not see my stash grow to the sky, the way those fortunate FIRECalc runs take off as rockets to the top right corner of the chart.

In short, I am not going to be living in a class C RV, except for extremely dire conditions. But by then, NM state parks would be crowded with these RVs, and I will have a lot of company to party with.
__________________
"Old age is the most unexpected of all things that can happen to a man" -- Leon Trotsky
NW-Bound is offline   Reply With Quote
Old 11-25-2016, 08:50 PM   #170
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 15,116
Quote:
Originally Posted by samclem View Post
Audrey,
In a recent post (here) , you mentioned that maybe a 4% withdrawal rate might be a bit conservative if it is paired with this portfolio valuation-weighting approach. I thought that might be the case, too, but as it turns out, 4% is probably not far off.

Assumptions: 30 year window, AA of 50% total market, 50% 5yr Treas.

Withdrawal method: a fixed percentage of each end-of-year portfolio value, no Clyatt 95% rule used

WR..........% of cases ending above real starting value.........Avg portfolio ending value
4%..............................54%............... .................................112%
4.1%...........................49%................ ................................108%
4.2%...........................44.8%.............. ................................105%
4.3%...........................41%................ .................................102%
4.4%...........................41%................ .................................98%

So, if we are using the "portfolio weighting" method, it would seem safe and appropriate to pick an annual WR that aims for the "center" of the expected distributions of the data set we are weighting to. If we pick the mean end portfolio value to represent that, then a WR of about 4.35% would be about right. If we want the median (just as many "failed" cases as successful ones), then a 4.1% rate looks about right.
There's probably way too much implied precision in the WRs suggested above based on our data set. I'd probably use approx 4.25% (again--after doing the weighting calculations every year) and feel pretty good about it. Or, use age-based WR numbers (Guyton, SAFEMAX, etc). Just the fact that we're calculating withdrawals based on end-of-year values will help assure that the portfolio won't grow to the sky or crash entirely.
Thanks again.

Yeah - I've been running running several scenarios and I see that 4.25% seems to be about the point where your average ending portfolio just barely above your average beginning (103%). Same allocation as yours. Worst case ending portfolio value was 52% over all runs from 1871.

I have been looking at the 1966 run as well for various withdrawals rates. I used this because in all cases it looks like it's still gives the lowest real portfolio value. In those cases, 4.25% of remaining portfolio draw would have the portfolio drop to 46% of initial value in real terms. This, of course, is the truly terrible nightmare run.

Looking at the withdrawal range I've been using, 3.25% to 3.33%, you're generally looking at a real portfolio drop to 53.6% go 54.3% worst case (1966) scenario, lowest ending portfolio value around 70% of the original real, and average ending portfolio value around 140% of original real.

I must say I'm very impressed with the Clyatt rule, at least with 50/50 portfolio, because using that rule just slightly underperforms the % of remaining portfolio method with a really small difference in term of ending portfolio and just a slightly smaller worst case drop. For example, using the Clyatt rules with for 4.25% withdrawal, lowest ending portfolio value is 51% instead of 52% of original value, and average ending portfolio value is around 101% instead of 103%. Worst case drop with a 1966 run is 45.7% versus 46.0%. So for some limiting in (nominal) income drop year after year, you aren't paying that much in terms of long-term portfolio outcome.

Interestingly, in the 1966 run case the Clyatt rule is rarely invoked, because in most cases, the portfolio is not more than 5% below the prior year in nominal terms. It finally does come in to play after the market crash of 1974, but results in just a slight difference in real final portfolio value (77.9% or original versus 78.4% without Clyatt rules) after 30 years.

Note to folks not that familiar with FIRECALC and the %remaining portfolio model with or without the Clyatt rules: Note that in the scenarios above, the ending portfolios don't go to zero like several cases do with constant spending (withdrawal) model. They don't even go below 45% of original, adjusted for inflation, even in the dreaded 1966 case, and on average, you end up with where you started, or better, after 30 years, even after inflation. And the worst cases for ending portfolio after 30 years aren't close to zero either - they are just above 50% real for the 4% and 4.25% withdrawal cases. The more conservative withdrawal rate of 3.3% gives you lowest ending portfolio in real terms of 70% of the starting value and average ending portfolio value of 139%.

In contrast, for the constant spending (withdrawal) model of 4%, the portfolio goes to zero in a few cases, the fastest after 27 years. The average ending portfolio is 115% of the original portfolio, compared to the 4% of remaining portfolio with average ending value of 112%. And the largest ending portfolio is 447% of initial portfolio in real terms, while the largest ending portfolio for the 4% of remaining portfolio is just above half of that at 244%. This is because whenever the portfolio grows faster than inflation, withdrawals grow faster in the % of remaining portfolio case which reduces the ending portfolio size.
__________________
Well, I thought I was retired. But it seems that now I'm working as a travel agent instead!
audreyh1 is offline   Reply With Quote
Old 11-27-2016, 10:45 AM   #171
Recycles dryer sheets
Earl E Retyre's Avatar
 
Join Date: Jan 2010
Posts: 246
Very interesting (and long) thread ...

Quote:
Originally Posted by nun View Post
I believe a mix of stocks, bonds, SS and other income sources is the right one for retirement or semi-retirement and those might be rental income, part time work, annuities, TIPs, CDs or pensions. Some of these might reduce potential retirement income, but come with a lot less volatility than stocks and bonds so you can stop worrying about the stock and bond markets quite so much.
Quote:
Originally Posted by Lsbcal View Post
... I don't think one should make a blanket statement about the right amount of risk. And a lot depends on one's overall portfolio size. The larger the size the less risk matters.

Most people would reduce risk if possible...
I am not convinced that "most people would reduce risk if possible". Based on many of the comments on some of the recent polls, I get the impression that many people have AA's containing a large % in equities (remainder mostly bonds) and do not hold much in CDs/cash, rental income, etc. Of course, the polls do not mention total portfolio size so it is possible all these posters have a relatively smaller portfolio size (but I somehow doubt that is the case).

I also wonder if anyone has any data showing what the best/highest 5-year federally insured CDs [ideally with a short term early withdrawal penalty] would have returned over the years (which may only go back 20 or so years). I found a site that showed "average" 5 year returns (Historical CD Interest Rates 1984-2016 - Bankrate). But it does not show highest (which can make a big difference in an historic analysis of portfolios containing a blend of CDs as an income floor). So, for example, in 1984 it shows average return of 11.54% which may not be far from highest - but in 2014-2016 it shows average return of only about .86% when one can find 3% CDs (far outperforming treasuries).
__________________
Earl E Retyre is offline   Reply With Quote
Old 04-17-2017, 07:34 AM   #172
Recycles dryer sheets
1-31-18's Avatar
 
Join Date: Mar 2017
Posts: 82
Quote:
Originally Posted by Gone4Good View Post
My approach is to discount current markets back to a level that represents the median valuation of the data set used to originally calculate your SWR. If you're using FIRECalc and PE-10, that would mean discounting the current equity market down to a valuation of about 16x from it's current 24x (a 33% haircut).

I'd also do the same thing with the bond market. 10-year treasuries are yielding 1.74% versus a median of 3.89%. Using an average bond market duration of about 6 years, that 200bp lower current yield results in a price discount of about 12%.

So assuming a 1MM portfolio and a 50/50 asset allocation, I'd mark the $500,000 in stocks down by 33% to $333,000 and the bond allocation down by 12% to $440,000.

My resulting $773,000 portfolio puts me right in the middle of the valuations used in our historic data set. Applying a 4% SWR, I get a withdrawal of about $31,000.

That means my undiscounted portfolio can support a withdrawal rate of 3.1%. Said another way, a 3.1% withdrawal today is equivalent to a 4% withdrawal at median valuations.


Very thoughtful and helpful. Gives me comfort that a 3 percent WD rate on a 50/50 portfolio should produce results similar to 4 percent initiated during normal market valuations. So, if Shiller is right (and I am a big fan of Shiller), then I can still retire in the next year or so and take that 3 percent if needed.

This assumes a 50/50 portfolio. What result for a 60/40 equity/debt AA? 65/30/5?
__________________
1-31-18 is offline   Reply With Quote
Old 04-17-2017, 08:32 AM   #173
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
NW-Bound's Avatar
 
Join Date: Jul 2008
Posts: 18,654
Gone4Good has not logged in for almost a year. Something to do with his screenname?

Well, maybe not. He was gone before for a couple of years, then came back for a while before disappearing again.
__________________
"Old age is the most unexpected of all things that can happen to a man" -- Leon Trotsky
NW-Bound is offline   Reply With Quote
Old 04-17-2017, 08:45 AM   #174
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
REWahoo's Avatar
 
Join Date: Jun 2002
Location: Texas Hill Country
Posts: 41,008
Quote:
Originally Posted by NW-Bound View Post
Gone4Good has not logged in for almost a year. Something to do with his screenname?

Well, maybe not. He was gone before for a couple of years, then came back for a while before disappearing again.
His blog hasn't been updated since January of 2016 and the last entry on his Facebook travels log was in June. Maybe this time he really is who he says he is...
__________________
Numbers is hard

When I hit 70, it hit back

Retired in 2005 at age 58, no pension
REWahoo is offline   Reply With Quote
Old 04-17-2017, 08:45 AM   #175
Thinks s/he gets paid by the post
Fedup's Avatar
 
Join Date: Mar 2014
Location: Southern Cal
Posts: 2,930
Quote:
Originally Posted by NW-Bound View Post
Gone4Good has not logged in for almost a year. Something to do with his screenname?

Well, maybe not. He was gone before for a couple of years, then came back for a while before disappearing again.
I checked his Facebook/website and he has not posted there either for a while. I hope all is well. I like his pictures.
__________________
Fedup is offline   Reply With Quote
Old 04-20-2017, 10:51 PM   #176
Recycles dryer sheets
 
Join Date: Oct 2012
Location: Reno
Posts: 456
Me too. We may have to wait 10 years, give or take 9.
That noted, the international has done pretty well so far this year, for the first time in quite a while. (There! I probably cursed it.)
That's how diversification should work, eventually--preferably before you are dead.

Quote:
Originally Posted by NW-Bound View Post
Ah hah! Someone finally brings this up.

Well, the above reason has been why I have been holding a larger AA in international stocks, particularly EM as I think developed European economies don't even look as good as that of the US.

Alas, I am still waiting to be vindicated. The past few years, I have been trailing the S&P for the above reason.

Now, US companies are doing a lot of business overseas too, probably a lot more than in 1960s and 1970s. Would that keep us from repeating that stagnant period? But then, we are talking free trade and all that politics stuff.
__________________

__________________
RobLJ is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Long term loss combined with long term gain dmpi FIRE and Money 9 12-21-2012 03:27 PM
How do I get my GF interested in preparing for her long term financial future? Mulligan FIRE and Money 58 10-26-2011 06:00 AM
Turbo Tax users preparing multiple returns... ziggy29 FIRE and Money 67 12-12-2008 07:21 AM
Diversifying Doesn't Lower Risk, But It Does Lower Potential Gain justin FIRE and Money 44 11-05-2005 04:16 PM

 

 
All times are GMT -6. The time now is 12:50 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.