New Wade Pfau article of great interest

[unclemick]

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 .

 

[unclemick]

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?

 

[Cut-Throat]

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.

 

[Options]

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.

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

 

[samclem]

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.

 

[Meadbh]

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.

 

[Options]

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.

 

[youbet]

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%.

 

[Cut-Throat]

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.

 

[audreyh1]

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.

 

[Midpack]

SWR always struck me primarily as a good guide to arriving at a nest egg $ amount, e.g. when to retire. And 4% was only for 30 years at 95% confidence with a certain AA, each of us must adjust for our own # of years, AA, % confidence plus our own individual (arbitrary sleep at night) safety factor as needed.

It was never intended even by the authors to be a set it and forget it withdrawal method. Adjusting as you go has always been a given despite all the misleading debate to the contrary.

 

[audreyh1]

SWR always struck me primarily as a good guide to arriving at a nest egg $ amount. And 4% was only for 30 years at 95% confidence with a certain AA, each of us must adjust for our own # of years, AA, % confidence plus our own individual (arbitrary sleep at night) safety factor as needed.

It was never intended even by the authors to be a set it and forget it withdrawal method. Adjusting as you go has always been a given despite all the misleading debate to the contrary.

Agreed. To me it was mainly an indicator of whether you had "enough" to retire, and if not then you had to decide how to reduce annual expenses or work longer.

 

[NW-Bound]

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.

How about joining a jungle tribe and just wear a loin cloth? No underwear needed.

3.) Non-discretionary annual expenses should be Less than 2% of portfolio amount (Ideally less than 1%)

I can do 2%, no problem. At 1%, life [-]is not worth living[/-] becomes very tedious.

Oh, wait! At 2%, if I can just keep up with inflation, that would last me 50 years. And that is without SS!

Nah! I will just continue to party the way I have been doing. My Moroccan-spiced grilled beef was a hit yesterday. My brother said he could smell it coming to the driveway as I was grilling in the backyard. Life's good. Party on!

 

[Cut-Throat]

I can do 2%, no problem. At 1%, life [-]is not worth living[/-] becomes very tedious.

Oh, wait! At 2%, if I can just keep up with inflation, that would last me 50 years. And that is without SS!

Nah! I will just continue to party the way I have been doing. My Moroccan-spiced grilled beef was a hit yesterday. My brother said he could smell it coming to the driveway as I was grilling in the backyard. Life's good. Party on!

I forgot to add S.S. and Pensions for the Non-discretionary expenses. I edited my post to add Social Security and Pensions as well to the amount of withdrawal for expenses.

 

[2017ish]

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.

Mostly true. But the associations are NOT free to do as they wish and are not voluntary (except to the extent that a company voluntarily underwrites a policy in a given state). The Life and Health Insurance Guaranty Associations (like the basic Insurance Guaranty Associations for liability and W/Comp.) are established and regulated by state laws--with funding from the insurance companies doing that type of business in the state.

(edited to fix Egregious typo/omission!)

 

[OrcasIslandBound]

Too conservative approach to retirement funding can lead to death before retirement. It's all a trade off.

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[Markola]

I just don't know how to apply the Pfau article to me, since his asset universe is limited to the U.S. I'm in Vanguard Life Strategy funds, which is the simplest and most diversified proxy I know of for owning the whole world's economy via one fund of index funds at a low coast. If an expert says "stocks will only rise 5%" and they are really only predicting the S&P 500, I can't factor in the comment.


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