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Kitces: Smart Fix for the 4% Rule
Old 08-01-2015, 06:25 PM   #1
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Kitces: Smart Fix for the 4% Rule

This new article answers a question often asked around here: when and how far can I ratchet up withdrawals if my portfolio value soars?

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Old 08-01-2015, 11:17 PM   #2
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Easy enough to figure out a "ratchet" based on a 100% successful SWR across your remaining life expectancy with some margin. No need for blindly adjusting like Kitces.

Even so, this just gets us more spending when we're 80. Not sure that helps a lot.
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Old 08-02-2015, 09:16 AM   #3
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Interesting article and conclusion of course makes sense given we are planning for worst case scenarios once you are past the early sequence of returns risk you start building an enormous stash, why not increase your spending if you desire.
Kitces work still models the traditional 30 year retirement, and this leads to an expected ratchet in years when you may be less able to enjoy the income as Animorph points out. Is there a study that shows the SWR equivalent versus years of retirement? It would be interesting to see that combined with ratcheting so we see expected ratcheting effects on longer term plans. I like raises when working I bet in retirement they could be even nicer.


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Old 08-02-2015, 09:19 AM   #4
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Easy enough to figure out a "ratchet" based on a 100% successful SWR across your remaining life expectancy with some margin. No need for blindly adjusting like Kitces.
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Old 08-02-2015, 09:44 AM   #5
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Also, the concept of SWR assumes that people have no downside flexibility (or don't want to exercise it).

But, if you have good early results, it seems that you now have downside flexibility. Why not take advantage of it?

Suppose I started at $1 million and took $40,000 in the first year because I felt that's a 95% success rate over 30 years.

Five years later, I have (an inflation adjusted) $1.5 million. Furthermore, I note that 4% has a 100% historic success rate over 25 years. Here are some non-level strategies:

1) How about "The greater of (X% of my current portfolio) or (Y% of my inflation-adjusted starting portfolio)"?

In this case, maybe X=6 and Y=2.7
I expect that backtesting that rule gives 100% historic success.

Now 6% of $1.5 million is $90,000,
and 2.7% of $1.5 million is $40,000.
So, I can take $90,000 this year, with the confidence that I can still get at least $40,000 in some future year if things go south.

2) Or, if I want to get really aggressive, why not just withdraw and spend $500,000, leaving a portfolio of $1 million with a $40,000 SWR at the 4% rate for the remaining 25 years?

3) Or, if that's too aggressive, maybe take 1/5 of the excess of my current portfolio over the portfolio I'd need to provide $40,000 at a 100% success rate for my current remaining lifetime.

4) Or, switch to VPW when my portfolio is so high that the VPW backtesting shows that even in down markets my withdrawals will stay above $40,000.
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Old 08-02-2015, 09:46 AM   #6
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...given we are planning for worst case scenarios once you are past the early sequence of returns risk IF you start building an enormous stash, why not increase your spending if you desire.
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