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Old 06-11-2007, 10:26 AM   #21
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Audrey,

I know he was talking about a 3-3.5% REAL annual return. My point was that if you use a 4% annual "safe" widrawal rate then you will also have to withdraw 0.5-1% of your principal every year which does not sound "safe" to me. My mistake was to forget that the 4% SWR rule does assume dipping into the principal which is one aspect of the rule I am not very comfortable with. I would personnaly only use a 4% SWR if I was able to get a REAL average rate of return of 4% or more. If I can't get 4% REAL return, I would probably lower my SWR so that I won't have to dip into the principal. That's why I was saying that if real returns are 3-3.5%, then in my opinion a 4% SWR is not necessarily "safe".

But I agree whith most of you guys that it is better to use a conservative expected rate of return in the planning stage so that if there is any surprise down the road it is more likely to be a good one (reaching FIRE sooner), than a disappointing one. I Think I will use M* numbers for planning purposes from now on.
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Old 06-11-2007, 10:59 AM   #22
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My Magic 8 ball says 4% real growth for US equities over the next 40 years. I know that's not what you want to hear--me neither
Samclem, actually I could live with a 4% real return for US equities over the next 40 years. I will have to adjust my current savings rate to still be able to achieve my FI goal on time while taking into account lower expected annual returns.
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Old 06-11-2007, 11:22 AM   #23
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Audrey,

I know he was talking about a 3-3.5% REAL annual return. My point was that if you use a 4% annual "safe" widrawal rate then you will also have to withdraw 0.5-1% of your principal every year which does not sound "safe" to me. My mistake was to forget that the 4% SWR rule does assume dipping into the principal which is one aspect of the rule I am not very comfortable with.
You sound fairly conservative, realize that there will be years that your
principal will go down on its own, possibly by double digits. If you can't
handle it, you might limit you investments in stocks and bonds, then you
are right, 4% will be too much.
TJ
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Old 06-11-2007, 11:39 AM   #24
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SWRs of 4% don't necessarily have to involve eating into principal, although they do eat up some capital gains, which some people might consider the same thing (i.e. the withdrawal is not derived solely from dividends and interest, but also by spending some of the market appreciation).

The SWR method and Portfolios in Work Less Live More show how you can use a widely diversified, low-volatility portfolio (about half stocks, half bonds) to get not only a 4%-4.5% SWR, but also keep the value of the portfolio substantially intact, even in inflation-adjusted terms, over the long run.
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Old 06-11-2007, 12:48 PM   #25
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tee,

I am pretty conservative but I do not intend to get below a 50% stock allocation in retirement. I understand that some years my principal will go down because of the market. In those years, though, I plan on lowering my expenses (maybe cut them by as much as 25-30%) and take a lower withdrawal rate. My expected budget would be flexible enough to do that.

My plan is as follows: once I retire I will try to aim for a 4% average annual real return. Some years I may hit it on the nose and get 4% return. I would take the 4% and live on it. Some years I may get 6%. I would take the 6%, use 4% to live on and stash the other 2% in a MMA. If the next year I get only 2% real return, then I would take the 2% + the 2% that was placed in the MMA the previous year and live on that. I understand that some years the principal will go down. In those years I can hopefully take a lower widrawal rate and/or use excess money placed in the MMA from previous above average years.
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Old 06-11-2007, 12:55 PM   #26
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The SWR method and Portfolios in Work Less Live More show how you can use a widely diversified, low-volatility portfolio (about half stocks, half bonds) to get not only a 4%-4.5% SWR, but also keep the value of the portfolio substantially intact, even in inflation-adjusted terms, over the long run.
That book has been an inspiration for me and this is exactly what I am intending to do. However, it seems that the returns Clyatt used in the book (probably based on historical data) are much higher than what M* is projecting for the future. So my contention is that one can still keep the value of one's portfolio substantially intact, even in inflation-adjusted terms, over the long but that in order to achieve that result the SWR will have to be lower then 4-4.5% quoted in the book.
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Old 06-11-2007, 02:05 PM   #27
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Well the "official" 4% SWR doesn't take 4% out every year. It sets an initial withdrawal of 4% of the portfolio the first year, and then each year after that adjusts the withdrawal amount for inflation. The actual % you are withdrawing then varies every year. But this method has been tested over many decades and all sorts of market conditions and has been shown to survive pretty well over long periods of time.

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Old 06-11-2007, 05:15 PM   #28
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Do note that our economy has developed further along the curve than where it was when the historic data was logged. Bernstein showed a nice chart in the 4 pillars about how economies develop from nascent through emerging through mature and, almost always...defunct.

We're probably far along in the maturation process, rather than transitioning from emerging to mature.

Hence, per his analysis...returns will slope off from here.

Unless the US economy is different from nearly all others in history.
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Old 06-11-2007, 10:49 PM   #29
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That book has been an inspiration for me and this is exactly what I am intending to do. However, it seems that the returns Clyatt used in the book (probably based on historical data) are much higher than what M* is projecting for the future.
Yes the returns are historical, but they are a necessary blend of very long term historical returns for some of the core asset classes and shorter term (20-50 year) returns for other asset classes like REITs or emerging markets, where the data simply hasn't been available.

The new edition will use the Dimson Marsh Staunton long term international data series, which actually lowers success rates a little, mostly because the European stock markets didn't always fare all that well during the 20th century, (to CFB's point).

Still the WLLM portfolios perform better than the M* averages you quoted mostly, in my view, because they bring in the additional asset classes and asset class permutations which boost expected return and contribute to an overall lower portfolio volatility -- Oil & Gas, REITs, Commodities, Private Equity. along with international bonds and stocks, as well as small stocks, domestic and international.

You can gain some comfort in the wisdom of this by the fact that big institutions today who make annual grants all seem to be investing this way, and making grants of around 4-5% of portfolio value.

By the way, the way the Work Less Live More SWR works is that you take, say, 4% of portfolio value each year, not 4% of Year1 value, with annual inflation adjustments. Real spending each year will therefore fluctuate up and down with market performance, but the result is greatly enhanced security (measured in survival of the real value of the portfolio) over long periods of time.
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Old 06-12-2007, 10:37 AM   #30
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That's why I was saying that if real returns are 3-3.5%, then in my opinion a 4% SWR is not necessarily "safe".
You have to balance your feeling of what's "safe" against your love of working for enough additional years to raise your stash to that level... or else reduce your ER spending plans. "Sleep at night" has a price.

A 4% SWR requires a stash of 25x your annual expenses and will involve some principal consumption.

A 3% SWR requires a stash of 33x your annual expenses or a spending reduction of 25% (from 4% to 3%).

Suddenly those higher-equity portfolios don't seem so volatile anymore!

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The new edition will use the Dimson Marsh Staunton long term international data series, which actually lowers success rates a little, mostly because the European stock markets didn't always fare all that well during the 20th century, (to CFB's point).
Excellent! That seems to be one of the best studies ever, as well as one of the world's most dangerous books (don't drop it on your feet or leave it lying on your chest). But it also points out the long-term dangers of inflation as well as the benefits of additional asset classes. In that regard a fixed-income portfolio is even more insidiously hazardous than investing in 100% b33ver-cheeze futures. Every asset class can be highly volatile as long as they're brought together in a non-correlated manner-- the result is much lower volatility.

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You can gain some comfort in the wisdom of this by the fact that big institutions today who make annual grants all seem to be investing this way, and making grants of around 4-5% of portfolio value.
That keeps institutions going for a lot longer than 40 years, too.

In 1999 the IRS briefly publicized an interest in raising their guidance to 6%. I guess it was overcome by events and I haven't heard anything since then...
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Old 06-12-2007, 11:01 AM   #31
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Oh and while we're on the subject, who's the comedian who had the language filter substitute beaver cheese for "beever cheeese"?
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Old 06-12-2007, 11:05 AM   #32
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Oh and while we're on the subject, who's the comedian who had the language filter substitute f*zzy b*nny for "beever cheeese"?
In your case it was the highest compliment we moderators could come up with... or maybe it was Dory's personal best!
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Old 06-12-2007, 11:11 AM   #33
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Well lemme tell ya, that was a bit confusing this morning when I put in b33ver ch33se and then saw my post...I said "how the heck did THAT happen?"

So i'm roughly equated with an investment product thats loved largely by a small number of nutty people, but has no actual intrinsic value?

Close enough.
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Old 06-12-2007, 11:26 AM   #34
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So i'm roughly equated with an investment product thats loved largely by a small number of nutty people, but has no actual intrinsic value?
Close enough.
Probably a highly volatile commodity based on moldy decaying organic fermentation, too...
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Old 06-12-2007, 05:23 PM   #35
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Which sort of wraps back around to that cheese joke I was going to put on Ha yesterday...
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