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New Withdrawal Rate Study
Old 05-31-2006, 08:19 AM   #1
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New Withdrawal Rate Study

http://www.fpanet.org/journal/articl...p0306-art6.cfm

Interesting reading. Now that I'm going ER within the next 3 months I guess its time to pick a strategy and stick to it.

Do most of you just stick with the 4%, or modify things as they go as suggested in the above article?
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Re: New Withdrawal Rate Study
Old 05-31-2006, 08:25 AM   #2
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Re: New Withdrawal Rate Study

Quote:
Originally Posted by cyclone6
Do most of you just stick with the 4%, or modify things as they go as suggested in the above article?
I try not to exceed my 95% number from FIRECalc. So far I'm batting 1000.

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Re: New Withdrawal Rate Study
Old 05-31-2006, 09:46 AM   #3
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Re: New Withdrawal Rate Study

Quote:
Originally Posted by cyclone6
Do most of you just stick with the 4%, or modify things as they go as suggested in the above article?
I may be a retired nuclear engineer, but it's a lot easier to stick with 4% than it would be to explain Guyton to my spouse. I can't even imagine explaining it to the average co-worker or skeptical relative.

Do a keyword search here (or on many ER boards) for "Guyton" and some of the following issues crop up:
- Monte Carlo analysis is more "conservative" than FIRECalc, or just about any other retirement planner for that matter, because it doesn't realize that returns from one year to the next are somewhat correlated. I'd hesitate to declare that MC is the "best" calculator for ER and not check other systems.
- The study's data lacks enough history for perspective. Heck, it barely avoids being called "data mining".
- A high-equity portfolio is considered essential to overcome inflation, but investor psychology has a tough time living with high volatility.
- Guyton's "rules" don't allow for much catch-up to inflation. You set a higher initial withdrawal rate because you have to live with that for a very long time while inflation eats away at it.
- Guyton is not an ER. I have a tough time reading this type of "research" from those who have no idea how to handle the daily routine or the emotional effects of ER. If we made Guyton live with his system for five or 10 years I bet he'd "research" a few new "conclusions"...
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Re: New Withdrawal Rate Study
Old 05-31-2006, 02:05 PM   #4
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Re: New Withdrawal Rate Study

The number of rules, their precedence, and the criteria for applying them make me suspect data mining. I anticipate the third article in the series will find that annual withdrawals can be doubled on even-numbered years not coincident with a presidential election, or some other means to devine the max wihdrawal rates given the 1973-2004 data pile (which won't likely match the next 40 years anyway).

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Re: New Withdrawal Rate Study
Old 05-31-2006, 03:54 PM   #5
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Re: New Withdrawal Rate Study

in any such study it is inevitable that the more complicated the "rules" the higher the return/swr
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Re: New Withdrawal Rate Study
Old 05-31-2006, 08:33 PM   #6
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Re: New Withdrawal Rate Study

Guyton is not too complicated and offers high withdrawl rates. What he does not offer is low volutility nor a floor on the withdrawls so his model risks a serious degradation of purchasing power. However, Guyton got me thinking about different models and comparing them.

I offer once again that there are other models other then the fixed inflation adjusted (original FIRECALC) model that I think offer higher withdrawls, some purchasing power risk (with a floor) and inflation adjustments and an oppurtunity to reap some of the market returns.

I personally like the Hybrib model (2.5% fixed + 2.5% variable) (yields 5% at 40 years with low volutility) but ESRBob's (yields 5.5% at 40 years) is not bad either but volitile. Most of you guys might think I'm full of BS or selling something that way I harp on this, but my only motivation was and is, is to understand the math behind the/a SWR and what make a good withdrawl model. All the above is with NO extras nor Ty's old age reduction scenerios. Adding Extras and/or Ty improves the SWr further.

I hope to ER in 3 to 5 to 10 years (depends on mkt) and will soon pick my model for the next couple of years at least.

From Nords, not picking a fight but i disagree with your statement (read Guyton many times).
- Guyton's "rules" don't allow for much catch-up to inflation. You set a higher initial withdrawal rate because you have to live with that for a very long time while inflation eats away at it.
Guyton throttles the withdrawls (up and down) based on the withdrawl percentage from the previous year. It keeps up with inflation well and also the portfolio growth. He starts with a higher withdrawl rate because he can throttle up/down the withdrawls based on the limits he imposes on the upper and lower bands of that rate.

I won't bore everyone with another graph. :P

job
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Re: New Withdrawal Rate Study
Old 05-31-2006, 09:24 PM   #7
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Re: New Withdrawal Rate Study

Quote:
Guyton is not too complicated
perhaps not ... i'm just not too sharp ... i've read the article several times and it's still not entirely clear to me, but as I said, I'm not too sharp.
ps: I like the charts
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Re: New Withdrawal Rate Study
Old 05-31-2006, 09:34 PM   #8
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Re: New Withdrawal Rate Study

How do those withdrawl models perform vs monte carlo where

1) the MC pseudo random number generator is Gaussian

2) the MC pseudo random number generator is Uniform

3) the pseudo random number generator has been modified to look in some way more real world than pure noise. Some attempts have been done at this but there is no settled upon approach.
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Re: New Withdrawal Rate Study
Old 05-31-2006, 10:32 PM   #9
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Re: New Withdrawal Rate Study

Was listening to Dave Ramsey on the long drive home today and someone asked how much is enough for retirement, his reply was in effect an 8% SWR, claiming 12% in mutual fund returns and 4% inflation.

I know, I know, it's entertainment radio.
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Re: New Withdrawal Rate Study
Old 05-31-2006, 10:52 PM   #10
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Re: New Withdrawal Rate Study

Guyton explained without all the BS;

first seperate the rules to determine the actual withdrawl and then the rules to get the money from which account.

Calc withdrawl:
At its heart it is the FIRECALC method, a fixed inflation adjusted method. *Withdrawls grow with inflation .. unless the portfolio has pretty bad results in which case the withdrawl is what it was last year (frozen).

Now if the portfolio does real good or real bad then of course the withdrawl rate will go down or up. *If the withdrawl rate goes outside some bounds (+/-20%) from the initial withdrawl rate, the withdrawl gets adjusted (-/+ 10)%.

Example 1: port = $100 and withdrawls = $4 => so withdrawl rate = 4%, ..
but just had *a bad year/s and port = $75, so the withdrawl rate is 4/75=5.3%. *5.3% is over then 20% threshold from the 4% withdrawl rate so CPR kicks in and the withdrawl is reduced 10% to $3.6.

Example 2: port = $100 and withdrawls = $4 => so withdrawl rate = 4%, ..
but just had *a good year/s and port = $135, so the withdrawl rate is 4/135=2.9%. *2.9% is over the 20% threshold from the 4% withdrawl rate so PR kicks in and the withdrawl is increased 10% to $4.4.

In each case the 4% initial withdrawl rate is the 'anchor' which your portfolio and withdrawls are measured against. *When the withdrawl rate gets to high (because of low portfolio value) then the withdrawls get reduced and when the withdrawl rate gets too low(due to a much larger portfolio), the withdrawls get increased.

I actually like the approach, but it gets too complicated to keep track of all this, not to mention the which bucket to take the withdrawl out of issue. * Thats another day. *The other thing he glosses over is the lost purchasing power could be extreme in some cases. * Being able to explain it is his biggest problem. * However that fact will likely mean he will be able to sell more seminars and books.

job
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Re: New Withdrawal Rate Study
Old 06-01-2006, 07:17 AM   #11
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Re: New Withdrawal Rate Study

Quote:
Originally Posted by Daddy O
Guyton explained without all the BS;
Nicely described, if it is accurate . I like models that adjust up and down a bit to deal with market changes (particularly down market changes). Since my 4% SWR leaves plenty of padding, I would keep any "extras" from high withdrawal years in a mad money fund to prop up the lower withdrawal in the bad years.
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Re: New Withdrawal Rate Study
Old 06-01-2006, 08:00 AM   #12
 
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Re: New Withdrawal Rate Study

Quote:
Originally Posted by larry
Was listening to Dave Ramsey on the long drive home today and someone asked how much is enough for retirement, his reply was in effect an 8% SWR, claiming 12% in mutual fund returns and 4% inflation.

I know, I know, it's entertainment radio.
Ol Dave has been telling folks about the 12% return for the last 5 years now. His listeners never call him on it, because they are all in debt!
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Re: New Withdrawal Rate Study
Old 06-01-2006, 08:40 AM   #13
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Re: New Withdrawal Rate Study

Quote:
Originally Posted by Daddy O
Guyton is not too complicated and offers high withdrawl rates.*
Maybe it would help me if you could give an example.*

The minimum I'd need in retirement is $40K/yr. Absolutely can't go below that, so a variable withdrawal plan must have this amount as a fixed minimum, anything less would be a problem.*

With the traditional 4% guideline, I'd need a $1,000,000 portfolio before retiring and I'd take $40K/yr inflation adjusted.* (Of course, as the years go by, I'd reevaluate my situation based on actual results.* But, I'd feel confident I could continue the 4% based on the fact that, historically, 4% has always survived.)

What portfolio value would I need to retire with the system you're suggesting to support a minimum $40K/yr withdrawal?
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Re: New Withdrawal Rate Study
Old 06-01-2006, 08:56 AM   #14
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Re: New Withdrawal Rate Study

Daddy O,
- I understood your explanation of Guyton--thanks.
- It appears that his withdrawal rules, while based on "fixed plus inflation" foundation, might actually produce more year-to-year variability in withdrawal amounts than a strategy based solely on year-end portfolio value without the special "if-then" rules.

- It seems to me that any strategy that bases annual withdrawal amounts on the inflation rate will increase the long-term risk of running out of $$ or maintain purchasing power year to year. If the assets within the portfolio aren't keeping up with inflation, then basing withdrawals on inflation is not a rational strategy--you'll run out of money or lose purchasing power, and the excessive withdrawals will severely reduce the ability to catch up if/when assets revert to the mean. If the portfolio is growing faster than inflation over the long term, then basing your withdrawals on inflation is not an optimum strategy: it deprives you of cash you could safely take while you are younger/more healthy. Since nearly every one of these inflation-indexed withdrawal methods ends up doing periodic "recalibrations" to the portfolio's true value, or they include an annual linkage to the scenario's value (as does your hybrid method and Guyton's method), I'm just not seeing the advantage of these approaches compared to just simply pegging the annual withdrawal to a % of the year-end value. If the year-to-year volatility of that approach is too uncomfortable, then use of ESRBob's "95% of last year's withdrawal" floor probably makes sense.

samclem

PS: I also like your charts.
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Re: New Withdrawal Rate Study
Old 06-01-2006, 09:12 AM   #15
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Re: New Withdrawal Rate Study

Quote:
Originally Posted by samclem
It seems to me that any strategy that bases annual withdrawal amounts on the inflation rate will increase the long-term risk of running out of $$ or maintain purchasing power year to year.*

- If the assets within the portfolio aren't keeping up with inflation, then basing withdrawals on inflation is not a rational strategy--you'll run out of money or lose purchasing power, and the excessive withdrawals will severely reduce the ability to catch up if/when assets revert to the mean.*

- If the portfolio is growing faster than inflation over the long term, then basing your withdrawals on inflation is not an optimum strategy:* it deprives you of cash you could safely take while you are younger/more healthy.*

I'm just not seeing the advantage of these approaches compared to just simply pegging the annual withdrawal to a % of the year-end value.**
I'm with you on this samclem. Just use a fixed % withdrawal strategy (which is so simple to implement!!!) and live with the annual variability. You'll probably feel better then way anyway - as you know you're being more frugal after a bad year, but you also get to take advantage of good years.

It's easy to "smooth out" annual usage after the fact - you don't have to spend all your withdrawals after a good year, and can set aside monies for that inevitable "bad year".

These withdrawal schemes were originally designed to mimic a regular annual salary with yearly inflation adjustments. People get used to fixed salaries. But that is not the "real world". It's better to get used to variability.

Audrey
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Re: New Withdrawal Rate Study
Old 06-01-2006, 09:20 AM   #16
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Re: New Withdrawal Rate Study

Quote:
Originally Posted by audreyh1
It's better to get used to variability.

Audrey
But what withdrawal number do you use to calculate how much $$$ minimum you want in your portfolio before you kick the work plug out of the wall and retire?*
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Re: New Withdrawal Rate Study
Old 06-01-2006, 09:33 AM   #17
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Re: New Withdrawal Rate Study

Well I personally still use 4%, which is probably too conservative under these (non-inflation indexed) circumstances, but I also need 50+ year portfolio survival.

Audrey
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Re: New Withdrawal Rate Study
Old 06-01-2006, 09:49 AM   #18
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Re: New Withdrawal Rate Study

Quote:
Guyton is not too complicated
Quote:
but it gets too complicated to keep track of all this
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Re: New Withdrawal Rate Study
Old 06-01-2006, 10:09 AM   #19
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Re: New Withdrawal Rate Study

Quote:
Originally Posted by audreyh1
Well I personally still use 4%, which is probably too conservative under these (non-inflation indexed) circumstances, but I also need 50+ year portfolio survival.

Audrey
Me too.* I find that when I use a more aggressive SWR number, I wind up "padding" the budget, assuming I can cut back in hard times, assuming the amount above 4% is variable or other gimicks which, when backed out, wind up still giving me approximately the 4% rate.* *

Regardless of the twists and spins you put on the calculation, you still need to formulate a retirement budget and balance that budget against sources of retirement income.* To calculate the amount you want in your retirement portfolio at RE, you must assume some withdrawal rate that must be supported over the years.

IMHO, calling the budget and the SWR "variable" just dodges the question "how much do I need?"
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Re: New Withdrawal Rate Study
Old 06-01-2006, 11:13 AM   #20
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Re: New Withdrawal Rate Study

Sorry for the confusion d. My point is that I think I understand it after reading it 5 to 10 times, but to explain it to someone (the masses) might not be easy.

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