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Old 06-21-2015, 05:00 PM   #41
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Originally Posted by Cut-Throat View Post
$1 Million Portfolio.

1.) You decide to take 5% of Portfolio Balance.
2.) First year you take $50 Grand.
3.) Portfolio tanks in a Bad Market Drop. it's now down to around $500K
4.) Next year you also take 5% of Portfolio Balance or about $25 Grand.

$25 Grand is 2.5% of the Starting $1 Million Portfolio.

So, your withdrawal amount is always against your Portfolio Balance, not the Starting Portfolio. Forces you to Sell high and not sell low.

Oh just cut your standard of living in half. Easy peezy.


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Old 06-21-2015, 05:13 PM   #42
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Originally Posted by daylatedollarshort View Post
I do not understand the ultra low safe withdrawal rates predicted for age 62+ age retirees. Even a zero real return over 30 years would provide a 3.33% SWR and one can do better than zero real with individual TIPS held to maturity, no volatility and government backed.

Because you are accepting volatility in your investments you need to accept the existence of the bad years. Those are the years with bad sequence of returns etc. that bring it down to sub 3.33.

Remember all this SWR is to allow you to be the person who retires with a crappy sequence of returns and survives. You can do this with 3.33 as above, but you forfeit the possibility of the 10-20% up years.

Annuities can raise the SWR because like bonds, they curb volatility, so make it less likely to have a bad sequence of returns affect you.


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Old 06-21-2015, 05:20 PM   #43
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Oh just cut your standard of living in half. Easy peezy.
Well, If you believe Ole Wade 2.5% is the new SWR..... So you can either start with 2.5% and 'cut your standard of living in half' from the 'get-go' or take 5% of Portfolio Balance and see if you really need to down the road. Your Choice!

Maybe the worst case won't happen !
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Old 06-21-2015, 05:27 PM   #44
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Originally Posted by Cut-Throat View Post
Well, If you believe Ole Wade 2.5% is the new SWR..... So you can either start with 2.5% and 'cut your standard of living in half' from the 'get-go' or take 5% of Portfolio Balance and see if you really need to down the road. Your Choice!
While waiting until 70 to take SS...
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Old 06-21-2015, 05:36 PM   #45
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Kevink wrote:"True enough Texas Proud, but I appreciate Bogle and Pfau's pessimism-cum-realism and would rather be pleasantly surprised using their numbers as a basis for my expectations.

OrcasIslandBound (great name by the way - Orcas Island is one of my favorite places on earth!) you sound like a kindred spirit in terms of risk/return appetite. According to Paul Merriman's risk tables a 40:60 bondtock allocation has a worst one year return of .23%, so you'd be taking on a bit more than that with your "conservative" 55:45 (I'm in the same boat), unless, as you say, you do a bond "barbell" of half 30 year Treasuries and the rest short term, a la Harry Browne's Permanent Portfolio.

I'll... " Thank you Kevink,

I find that I don't really have time to do a huge amount of simulation regarding optimizing the portfolio return, so have to exercise judgment on how to best invest given the near peaking of the Schiller 10 year price to earnings ratio and the prolonged low interest rates. I was thinking 3% for bonds and 9-10% stocks, thus the weighted sum average would be about 6 %. The lousy climate in bonds would have me increase my stock holdings. But the exceptionally high PE ratios in stocks would have me increasing my bond holdings. What am I supposed to do with these choices?

We have a house in Orcas island that we bought nearly 3 years ago and haven't spent a single night in it yet as it has been rented this entire time. Well, the tenants are nearly finished building a house and we'll be "camping out" in our own house finally for the whole month of August. Can't wait!


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Old 06-21-2015, 05:46 PM   #46
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Originally Posted by Cut-Throat View Post
Say you start taking a 5% of Portfolio Balance and your Portfolio drops in Half due to market meltdown, you're now effectively taking 2.5% of your Portfolio. So, why start your spending with a 'worst case' Withdrawal, if you may not need to?
How I interpreted this paragraph:

Let's say the starting value of the portfolio is $1 million.

Year 1, Day 1: Withdraw 5% of $1 million, or $50,000.
Remaining portfolio = $950,000.
Market meltdown reduces portfolio balance by 50%, to $475,000.
Buy new underwear.

Year 2, Day 1: Withdraw $50,000, or 10.53% of remaining portfolio.
Portfolio now valued at $425,000.
Buy more new underwear.

What I believe CT was trying to say:

Let's say the starting value of the portfolio is $1 million.

Year 1, Day 1: Withdraw 5% of $1 million, or $50,000.
Remaining portfolio = $950,000.
Market meltdown reduces portfolio balance by 50%, to $475,000.
Buy new underwear.

Year 2, Day 1: Withdraw 2.5% of original portfolio, or $25,000.
Remaining portfolio = $450,000.
Patch old underwear and move to a van down by the river.
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Old 06-21-2015, 06:06 PM   #47
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Because you are accepting volatility in your investments you need to accept the existence of the bad years. Those are the years with bad sequence of returns etc. that bring it down to sub 3.33.

Remember all this SWR is to allow you to be the person who retires with a crappy sequence of returns and survives. You can do this with 3.33 as above, but you forfeit the possibility of the 10-20% up years.

Annuities can raise the SWR because like bonds, they curb volatility, so make it less likely to have a bad sequence of returns affect you.
I am not sure who the "you" refers to in your post. If the you means me specifically, I'm looking at matching strategies with low volatility, not looking for any 10 - 20% up years or much sequence of return risk. If the financial pundits really believe going forward for 10+ years real returns will be super low, why not recommend (or at least mention) a known strategy (TIPS ladders, I-bonds, liability matching, etc.) with a higher SWR than their forecasts and no sequence of returns risk?

Matching strategy - Bogleheads
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Old 06-21-2015, 06:16 PM   #48
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I predict that 10 years from now Mr. Pfau's research will be showing different numbers, but his recommended approach will still involve annuities.
To his credit, Pfau presents a balanced discussion of the annuity/no annuity debate (although he does personally views SPIA and deferred annuitization as viable PF components).

See this: Your Clients' Toughest Retirement Decision
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Old 06-21-2015, 06:21 PM   #49
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Annuities seem really disturbing to me. Today's rates for a 59 year old are barely above a long term bond index fund rate. Seems like a shame to pay a bunch of fees for so little return.

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Old 06-21-2015, 06:22 PM   #50
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And BTW you have to trust the insurance company that provides the annuity not to go bankrupt

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Old 06-21-2015, 06:49 PM   #51
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The problem is not "What is the SWR today"....The problem is using an SWR as a withdrawal method. (Which no one ever has anyway, so I fail to see the interest in this topic) The SWR was a 'Rule of Thumb'. If you use a Withdrawal Method that is Variable based on Portfolio Balance, you really don't have to care.

Say you start taking a 5% of Portfolio Balance and your Portfolio drops in Half due to market meltdown, you're now effectively taking 2.5% of your Portfolio. So, why start your spending with a 'worst case' Withdrawal, if you may not need to?
And so 21 years and counting my general unified theory of chickenheartness marches on. I don't read as many studies or use as many retirement calculators as early on in ER when I was much much more 'gervous and nerky'. My detailed analysis of future returns and SWR is down to placing a wet forefinger on bellybutton and looking at current expenditures vs portfolio percents.

Help at age 72 comes from my best Buds at the IRS and their RMD calculations - an offer I can't refuse. They have those durn life expectancy estimates built in which I choose to avoid thinking about.

heh heh heh - And I won't even whisper psssst Wellesley .
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Old 06-21-2015, 07:01 PM   #52
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Originally Posted by Meadbh View Post

How I interpreted this paragraph:

Let's say the starting value of the portfolio is $1 million.

Year 1, Day 1: Withdraw 5% of $1 million, or $50,000.
Remaining portfolio = $950,000.
Market meltdown reduces portfolio balance by 50%, to $475,000.
Buy new underwear.

Year 2, Day 1: Withdraw $50,000, or 10.53% of remaining portfolio.
Portfolio now valued at $425,000.
Buy more new underwear.

What I believe CT was trying to say:

Let's say the starting value of the portfolio is $1 million.

Year 1, Day 1: Withdraw 5% of $1 million, or $50,000.
Remaining portfolio = $950,000.
Market meltdown reduces portfolio balance by 50%, to $475,000.
Buy new underwear.

Year 2, Day 1: Withdraw 2.5% of original portfolio, or $25,000.
Remaining portfolio = $450,000.
Patch old underwear and move to a van down by the river.


Actually it was a fish camp on pilings over Lake Pontchartrain. Then along came Katrina. One must take life's little ups and downs somewhat aggressively. Hindsight says roughly the range of my portfolio percents was 2 to 6.9 percent give or take.

heh heh heh -retirement is great provided I retain my sense of humor and don't whine too much about $ I didn't convert to ROTH when gazing at the old crystal ball. Was it Yogi Berra who said the future ain't what it used to be?
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Old 06-21-2015, 09:10 PM   #53
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Originally Posted by Meadbh View Post

How I interpreted this paragraph:

Let's say the starting value of the portfolio is $1 million.

Year 1, Day 1: Withdraw 5% of $1 million, or $50,000.
Remaining portfolio = $950,000.
Market meltdown reduces portfolio balance by 50%, to $475,000.
Buy new underwear.

Year 2, Day 1: Withdraw $50,000, or 10.53% of remaining portfolio.
Portfolio now valued at $425,000.
Buy more new underwear.

What I believe CT was trying to say:

Let's say the starting value of the portfolio is $1 million.

Year 1, Day 1: Withdraw 5% of $1 million, or $50,000.
Remaining portfolio = $950,000.
Market meltdown reduces portfolio balance by 50%, to $475,000.
Buy new underwear.

Year 2, Day 1: Withdraw 2.5% of original portfolio, or $25,000.
Remaining portfolio = $450,000.
Patch old underwear and move to a van down by the river.
Nope on both accounts.... Here is what I said:

$1 Million Portfolio.

1.) You decide to take 5% of Portfolio Balance.
2.) First year you take $50 Grand.
3.) Portfolio tanks in a Bad Market Drop. it's now down to around $500K
4.) Next year you also take 5% of Portfolio Balance or about $25 Grand.

$25 Grand is 2.5% of the Starting $1 Million Portfolio.

So, your withdrawal amount is always against your Portfolio Balance, not the Starting Portfolio. Forces you to Sell high and not sell low.

You are always taking 5% of the Remaining Portfolio Balance... Pretty simple concept. Personally I like VPW which is an ever escalating percentage, but I thought I'd keep things simple here.
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Old 06-21-2015, 09:25 PM   #54
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Originally Posted by OrcasIslandBound View Post
Annuities seem really disturbing to me. Today's rates for a 59 year old are barely above a long term bond index fund rate. Seems like a shame to pay a bunch of fees for so little return.

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Which is why it's always recommended not to annuitize until at least 70, if not 80 and beyond, due to the mortality credits. Annuitization is one method that can serve as a plan B or C should things appear to not be working out as planned in later years.

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Originally Posted by OrcasIslandBound View Post
And BTW you have to trust the insurance company that provides the annuity not to go bankrupt

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Which is why you break annuities up below your state's guaranty protection limit.

See this: Annuity State Guaranty Protection Limits - Find Out How Much Your Annuity Is Covered For
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Old 06-21-2015, 10:35 PM   #55
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Which is why you break annuities up below your state's guaranty protection limit.
See this: Annuity State Guaranty Protection Limits - Find Out How Much Your Annuity Is Covered For
Just so no one misunderstands (and I know you know this)--the states don't guaranty any annuities. The insurance companies band together, form voluntary associations, and agree to cover each other if someone has trouble paying claims. Should work fine if it is one poorly-run company that runs aground, maybe not fine if there's a systemic issue and bailing out one company will drag others off the edge of the cliff.
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Old 06-21-2015, 10:55 PM   #56
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Originally Posted by Cut-Throat View Post
Nope on both accounts.... Here is what I said:

$1 Million Portfolio.

1.) You decide to take 5% of Portfolio Balance.
2.) First year you take $50 Grand.
3.) Portfolio tanks in a Bad Market Drop. it's now down to around $500K
4.) Next year you also take 5% of Portfolio Balance or about $25 Grand.

$25 Grand is 2.5% of the Starting $1 Million Portfolio.

So, your withdrawal amount is always against your Portfolio Balance, not the Starting Portfolio. Forces you to Sell high and not sell low.

You are always taking 5% of the Remaining Portfolio Balance... Pretty simple concept. Personally I like VPW which is an ever escalating percentage, but I thought I'd keep things simple here.
Thank you for the clarification. This method should prevent running out of money, but in a severe downturn, the strong correlation of withdrawals with recent portfolio balances would mean severe austerity, unless the retiree had been withdrawing significantly in excess of expenses and socking the excess away in a cash buffer outside the "portfolio" to begin with. Without such a cash buffer, this strategy could result in marked income volatility.
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Old 06-22-2015, 12:46 AM   #57
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Just so no one misunderstands (and I know you know this)--the states don't guaranty any annuities. The insurance companies band together, form voluntary associations, and agree to cover each other if someone has trouble paying claims. Should work fine if it is one poorly-run company that runs aground, maybe not fine if there's a systemic issue and bailing out one company will drag others off the edge of the cliff.
Should that happen we'll have much bigger problems to be concerned about. Yes, asteroid strikes are always a possibility.
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Old 06-22-2015, 12:59 AM   #58
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TAKE .... ME .... TO .... YOUR .... LEADER

I think there were a number of us 'robots' who did not curtail spending during the last meltdown. You can't get those years back, you maybe can't get the activities back. Some opportunities only knock once.

For me, this is the advantage of starting with a conservative plan. You can (and I did) ride out some bad times. I remember looking at those charts back then, and recognizing I was looking at some historic drops in the market. But that's what I saved for, so I carried on and enjoyed life and slept well.

-ERD50
Pencil me in as a robot too. We never reduced spending during the Great Recession despite our portfolio being down in excess of 30%.
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Old 06-22-2015, 08:08 AM   #59
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This method should prevent running out of money, but in a severe downturn, the strong correlation of withdrawals with recent portfolio balances would mean severe austerity, unless the retiree had been withdrawing significantly in excess of expenses and socking the excess away in a cash buffer outside the "portfolio" to begin with. Without such a cash buffer, this strategy could result in marked income volatility.
This is a common Misconception. Any 'marked income volatility' would be the result of too high of stock allocation in the person's asset allocation. Your volatility can be backtested with VPW as well. You can also mitigate volatility by delaying S.S. to age 70 as well. My personal largest historical withdrawal amount reduction is about 15% which is hardly 'breaking a sweat'.

Also, if expenses of around 4% of the portfolio is largely taken up by non-discretionary expenses, they probably should not completely retire or severely reduce their non-discretionary expenses. I recommend that a person's non-discretionary expenses be 2% or less of their portfolio amount. Ideally less than 1% of their portfolio amount in addition to any S.S. and Pensions. Then any volatility will easily be adapted to. (If, you don't have enough money, you should not retire)

All of these steps are part of proper retirement income planning.

1.) Proper asset allocation for desired level of risk and volatility
2.) Delay of Social Security to age 70
3.) Non-discretionary annual expenses should be Less than 2% of portfolio amount (Ideally less than 1%) Plus SS and Pensions.
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Old 06-22-2015, 08:23 AM   #60
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I think income volatility causing problems is overemphasized. There are several things that can mitigate it including lower taxes after bad years. A prudent early retiree probably won't immediately ramp up their spending to exactly match a big jump in income, so there is likely some left over to help smooth future years. If a large drop in income occurs after several years of income increases, it is not so likely to cause problems. The retiree will be very happy they withdrew the money "when they could".

I think a lot of these variable withdrawal schemes go through a lot of trouble to smooth the withdrawals. Income volatility does not necessarily mean spending volatility. IMO it's easier to manage the cash flow after the fact and more gradually ramp up spending if one is concerned about say a 20% drop in income the next year. If that doesn't materialize, they can decide how to spend the leftovers.
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