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Playing around with numbers
Old 02-19-2014, 10:58 AM   #1
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Playing around with numbers

I love playing around with numbers and whenever I calculate my portfolio value, there is one "metric" that I always want to calculate. I think I either read it in a book or article or on this forum, but not sure. Maybe I dreamed it up somewhere along the line. The metric is dividing my portfolio value by 100 minus my age. My interpretation of this metric is it is the amount I can withdrawal each year (and increase with inflation each subsequent year) if my investments exactly keep up with inflation and I live to be 100. Does anyone remember reading about this anywhere? For some reason, I always want to calculate it, even though I'm not sure how meaningful it is. Maybe the number is a very safe withdrawal yearly amount?
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Old 02-19-2014, 11:04 AM   #2
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Originally Posted by David1961 View Post
I love playing around with numbers and whenever I calculate my portfolio value, there is one "metric" that I always want to calculate. I think I either read it in a book or article or on this forum, but not sure. Maybe I dreamed it up somewhere along the line. The metric is dividing my portfolio value by 100 minus my age. My interpretation of this metric is it is the amount I can withdrawal each year (and increase with inflation each subsequent year) if my investments exactly keep up with inflation and I live to be 100. Does anyone remember reading about this anywhere? For some reason, I always want to calculate it, even though I'm not sure how meaningful it is. Maybe the number is a very safe withdrawal yearly amount?
If you plan on living to 100, then your metric tells you how much you could live on (ie, spend) sans any growth (or any fluctuation) in your portfolio. The portfolio under your model would be completely depleted at 100 years old.

In my opinion this metric, which I'll call the Static Depletion Model (SDM), is pretty basic and I believe that you can do better.

John Bogle (and others) use that same metric (100-age) to set the equity allocation in a portfolio when the portfolio consists of your assets plus the present value of your Social Security benefit and the present value of any pension you may have.
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Old 02-19-2014, 02:10 PM   #3
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I like that metric too as it is simple and guarantees you will never run out of money. Of course you have to adjust for things like social security, pensions, etc.

The problem is it is probably too conservative. The portfolio will likely earn more than inflation so your real income will increase over time. Might be better to keep real income level or maybe even decrease over time ( spend while young).
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Old 02-19-2014, 03:09 PM   #4
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But it isn't really static. If the portfolio increases faster than inflation, then the calculated withdrawals will go up as well.
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Old 02-19-2014, 04:49 PM   #5
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Still, it is a fun one to compete. I fully understand why you enjoy doing this type of computation and agree entirely!!

Right now this metric makes me feel a lot better about how much I spend, that's for sure, probably because my portfolio is hitting all time highs frequently due to the booming market. Still, even during worse years it would be fun to compute.
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Playing around with numbers
Old 02-21-2014, 09:36 AM   #6
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Playing around with numbers

Using the OP's formula, my withdrawal rate would be 2.2% - more conservative than I need to be. Do you get the same result?
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Old 02-21-2014, 10:10 AM   #7
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Using the OP's formula, my withdrawal rate would be 2.2% - more conservative than I need to be. Do you get the same result?
Yes, using the formula yields a WR of less than 2%. More conservative than I need to be.
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Old 02-21-2014, 01:43 PM   #8
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That was fun to play with. I am learning new software, so go easy on the chart quality. Had to switch scales at age 90 to make it at all readable.
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Old 02-25-2014, 01:10 PM   #9
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That was fun to play with. I am learning new software, so go easy on the chart quality. Had to switch scales at age 90 to make it at all readable.
Midpack:

Thanks for the graph. Looks like at age 90, I can start living like a king!!
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Fun with Compound Interest and nestegg Depletion Models
Old 02-25-2014, 03:14 PM   #10
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Fun with Compound Interest and nestegg Depletion Models

Quote:
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That was fun to play with. I am learning new software, so go easy on the chart quality. Had to switch scales at age 90 to make it at all readable.
You have me motivated Midpack !

For fun and adventure, I ran a similar case with 2% real grwth rate but taking distributions using the IRS RMD formula extended back to 65 years old. The benefit with the RMD formula is it (intelligently) depletes the nestegg over your lifespan. Notice that you woul have much more income in all but the few years before 100 years old. It goes without saying the under the Static Depletion Model most of us will be dead before the income gets big. The RMD Depletion model attempts to overcome that problem.

The results for a $1MM portfolio with 2% real growth and 1,2,3 % dividends is shown. The top part shows the Nestegg value over the years. The bottome part shows your income through the years for portfolio's with 1,2,3 % annually distributed dividend income as well as a constant 4% SWR model.

Note that under the OP's Static Depletion Model your income at 65 years old would be around $28k. With the IRS RMD depletion model your income at that age would be up to $61k (depending on portfolio dividends).
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Old 02-25-2014, 04:17 PM   #11
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Acknowledging that 1) There are a lot of retirement formulae out there, 2) Each has some "bias" (intentional or not) 3) They are all fun to play with 4) They all lead to widely divergent results (especially over a long time and depending on many factors): My take is that it is important to decide what your OWN biases are before picking one or more formulae.


My Biases (in order of importance)

1. I must never run out of money even if I (or DW) live to the 99+% percentile of normal human age.

2. I must not leave too much money on the table at my (our) final exit.

3. 1 trumps 2 in all cases

4. I trust no formula to model the next (perhaps) 30+ years, so I must have backups to my backups.

For these reasons (and probably reasons I can not articulate) I used retirement calculators to PLAN for retirement (How much will I need?) and to tweek spending now that I'm retired. There is no formula etched in stone on my desk. Having said all that, I still love to play with many of the formulae. Go figure!
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Old 02-25-2014, 05:21 PM   #12
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Originally Posted by MasterBlaster View Post

John Bogle (and others) use that same metric (100-age) to set the equity allocation in a portfolio when the portfolio consists of your assets plus the present value of your Social Security benefit and the present value of any pension you may have.

Could we see that broken down?
Hypothetically

A 58 year old has $700,000 in cash only, (nothing else)
will collect $1000 SS and a $500 pension at age 65.

How doe he allocate now?
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Old 02-25-2014, 05:46 PM   #13
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Could we see that broken down?
Hypothetically

A 58 year old has $700,000 in cash only, (nothing else)
will collect $1000 SS and a $500 pension at age 65.

How doe he allocate now?
Rather than answer your question directly, I will refer you to (one of many) Boglehead forum discussions on this topic. Read through the posts and you'll see that you can indeed allocate your assets by also considering SS and your pension. This topic is somewhat controversial though, as you will read.

Bogleheads € View topic - Can pension be counted as part of bond allocation?
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Old 02-26-2014, 09:54 AM   #14
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Originally Posted by David1961 View Post
I love playing around with numbers and whenever I calculate my portfolio value, there is one "metric" that I always want to calculate. I think I either read it in a book or article or on this forum, but not sure. Maybe I dreamed it up somewhere along the line. The metric is dividing my portfolio value by 100 minus my age. My interpretation of this metric is it is the amount I can withdrawal each year (and increase with inflation each subsequent year) if my investments exactly keep up with inflation and I live to be 100. Does anyone remember reading about this anywhere? For some reason, I always want to calculate it, even though I'm not sure how meaningful it is. Maybe the number is a very safe withdrawal yearly amount?
Ok... I got really depressed because there were no parenthesis or commas in that metric.

I read it as (Portfolio-Value / 100) - age. Using operator order, etc.
I now understand it's: Portfolio-Value / (100-age).

Big difference.

That metric was going to extremely hit my OMY feeling, despite firecalc, fidelity RIP, etc saying otherwise.

Once I figured out the intention, I got a lot more comfortable, since it's much closer to our planned withdrawals. (Still more conservative than our plan - but not by much.)

Man that was depressing until I figured it out.
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Old 02-26-2014, 10:06 AM   #15
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Ok... I got really depressed because there were no parenthesis or commas in that metric.

I read it as (Portfolio-Value / 100) - age. Using operator order, etc.
I now understand it's: Portfolio-Value / (100-age).

Big difference.

That metric was going to extremely hit my OMY feeling, despite firecalc, fidelity RIP, etc saying otherwise.

Once I figured out the intention, I got a lot more comfortable, since it's much closer to our planned withdrawals. (Still more conservative than our plan - but not by much.)

Man that was depressing until I figured it out.
rodi:

I never thought about parenthesis but that's a good point. (Boy and I did so well in algebra, too, but that was many years ago! LOL) Yes the formula is:

Portfolio value / (100 - age)
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