Question on ESRBob's withdrawal method

brewer12345 · 01-02-2006, 10:22 AM

One thing I didn't see in the book (which I think is excellent, BTW), was much commentary on how the 4%/95% methodology fared in a stagflationary environment. Clearly the value of the portfolio was relatively well sustained, but after several years of an ugly environment, what did the proverbial 1966 retiree's inflation-adjusted income look like? Was it so severely degraded by several "95% years" that their real income essentially forced them back to work full time (or eating cat food)?

ESRBob · 01-03-2006, 07:24 PM

Brewer,
Great question. I pulled up the old file (which I would be happy to send to anyone, btw -- it is an excel attachment -- PM me with your email address or email me at bob@workless-livemore.com).

Turns out the going got rough but not to the point of cat-food eating. During the tough years starting in 1966, the bottome point was hit in 1974-- where the nominal value of the portfolio was the same in 1974 as it had been in 1966, and in inflation -adjusted terms it was down 35%. (Meaning your real withdrawal was about 35% lower that year than it had been.)

The 95% Rule had 'kicked in' 5 times by 1975, giving you an extra percent or so of withdrawal in each of those years in order to ensure you had at least 95% as much income each year as you had the year before. Inflation was the killer, though, eroding spending power. That is how you got down to a real withdrawal 35% lower than you started with 10 years earlier.

So while the adjustment was gradual, it was not trivial. This was the perfect time for a combination of belt-tightening, part time work and deep philosophy about the meaning of disposable income. But by staying the course and sweating out those bad years, you ended up with a portfolio 30 years later that was close to 50% up in real terms. Note that during these years the traditional 4% withdrawal methods with inflation adjustments all either crashed and burned (anything with less than 50% stock) or still ended up well below the initial portfolio value in real terms.

So, in a stagflation environment, retirees, especially ERs, wanting to live off a Safe Withdrawal Rate method have to do something different -- they either use a a regular stepwise adjustment like the 95% Rule or they go bust (or get seriously, possibly irreversibly depleted)-- you can't have it all during periods like 1966-1996.

Let's hope we arent' facing another period like that, but if we are (and you never know until years later), then the 95% Rule with belt-tightening and a bit of spare income on the side will see you through, at least as long as it doesn't get any worse than the 17 long lean years following 1966.... Oops, got to get off to my tennis game!

01-04-2006, 04:58 AM

Quote:

Originally Posted by ESRBob

Note that during these years the traditional 4% withdrawal methods with inflation adjustments all either crashed and burned (anything with less than 50% stock) or still ended up well below the initial portfolio value in real terms.

So, in a stagflation environment, retirees, especially ERs, wanting to live off a Safe Withdrawal Rate method have to do something different -- they either use a a regular stepwise adjustment like the 95% Rule or they go bust (or get seriously, possibly irreversibly depleted)-- you can't have it all during periods like 1966-1996.

Hi. Bob. This is a great point. Some kind of feedback to account for prolonged bad markets seems to be essential.

Have you had a chance to look into Henry Hebeler's "retirement autopilot"? If so, what are your thoughts on his algorithm?

Bought your book, and really enjoyed reading it. Thanks for your good work!!

brewer12345 · 01-04-2006, 07:18 AM

Thanks for the answer, Bob. I will e-mail you for the data.

FWIW, I don't think that that invalidates the withdrawal methodology at all. It does make me believe that the retiree who chooses that strategy had either better have an alternate source of income or a very flexible budget. I wonder how the same hypothetical retiree would have fared with a portfolio holding an 8 or 10% allocation of commodities (PCRIX or similar)? Guess we would have to go through another ugly period like that to find out.

ESRBob · 01-04-2006, 12:04 PM

Quote:

Originally Posted by brewer12345

I wonder how the same hypothetical retiree would have fared with a portfolio holding an 8 or 10% allocation of commodities (PCRIX or similar)? Guess we would have to go through another ugly period like that to find out.

Yeah, the historical data for the kinds of portfolios retirees seem to be holding today (alternative asset classes such as commodities and REITs, value, small, international) just don't exist with enough length and consistency to really know, but piecing together all the available data points suggests they would hold up better during a period like 1966-82, even with the traditional 'set a withdrawal amount and adjust it up annually for inflation' approach.

And to modify something I said in an earlier post -- it isn't that you don't know things are going downhill when you're in the middle of a period like the 70s, but rather that you are locked into a system that is statistically supposed to bail you out over the long run. So you keep thinking next year or the year after that will fix things and therfore you can keep withdrawing your inflation-adjusted annual spending needs. By the time you realize this time is different and things have gone from bad to worse, your nest egg is so depleted that even a series of good years can't bring it back. The beauty of taking a percent of portfolio value each year is that you take your medicine in small doses over time and do a far better job of coming through these 1-in-20 or 1-in-50 worst-case scenarios.

brewer12345 · 01-04-2006, 12:22 PM

Yeah, Bob, I like the 4%/95% methodology better than the "set and forget 4%" method. However, it pays to understand what you are getting into when you plan on depending on your portfolio for income. Like I said, the 4%/95% method is probably best suited to those with very flexible expenses or wh are still working PT and can ramp up their earnings relatively easily.

jug · 01-04-2006, 12:32 PM

Regarding this particular topic about allocation and SWR, I went to my fidelity guy last week, he took my numbers, and said he will run all sorts of scenarios on his puter and get back to me.

Its too bad we have to worry about money, but in reality, I dont think many who have ER'd do since the lifespans we anticipate do not work out for many of us, and we do sort of scale back as we got older.

Most well heeled older folk did pretty well and died with a bundle.* Ive seen few cases where the money actually ran out.

This is very evident by the amount of senior rushing to Atlantic City each day, they seem to have the disposible income, they come with little oxygen tanks and all.

Live it up, its probably later than we think..

My wife just coined a new phrase for ER, she told our son to go bug off and get out on his own, he is 27, and not 100% independent.

She told him that she just formed a new club "Seniors gone wild"* She's 52 and IM 53 and we are rebelling against our ungratefull children.

Break out the prune juice

L'chaim!!!
jug

brewer12345 · 01-04-2006, 12:50 PM

Quote:

Originally Posted by jug

Break out the prune juice

L'chaim!!!
jug*

Time for a "Pile Driver":

2 parts prune juice
1 part vodka

Shake with ice in a mixing glass and strain into a martini glass. Garniish with a chocolate Exlax wafer.

. . . Yrs to Go · 01-04-2006, 06:06 PM

Great thread!* I had the same question.* Thanks for the response.

Quote:

Originally Posted by ESRBob

Turns out the going got rough but not to the point of cat-food eating.* During the tough years starting in 1966, the bottome point was hit in 1974-- where the nominal value of the portfolio was the same in 1974 as it had been in 1966, and in inflation -adjusted terms it was down 35%.* (Meaning your real withdrawal was about 35% lower that year than it had been.)

It strikes me that this was also true for many working folks who were either late to get COLAS or found themselves out of work during those tough times.*

unclemick · 01-04-2006, 06:44 PM

Hmmm

Memory says - the dismal stock performance early in the period caused a lot of retiree's to go CD's, MM and other fixed instruments. I believe even in the 80's - the Terhorst's started that way.

Luckily - I was working so I DCA'd through the entire 18 yr flat period.

A period of stagflation will require - unfogging the old memory banks. TIP's, Inflation protected securities, and the number of foreign market instruments weren't around or less availible then.

Wellesley, VG Trustee's co-mingled International, VG PM, and some timberland come to mind - also Homestake, Anasarco and a few other mining stocks.

Alas - now a days - a Boglehead balanced indexer - pretty much.

P.S. - I just take the divs/interest and try to be happy. Worry is optional.

Chris24 · 01-04-2006, 11:42 PM

ESRBOB. I have read your book, and also bought a few other for Christmas presents. One thing that bugs me about SWR is everything is predicated on a set infaltion rate and allocations Looking in the past. My feelings are they are a good guide, but not set in stone. When one retires, spending habits, costs change. I think there was a thread not too long ago about personal inflation rates. 6% withdrawl rate with a a set 2% for infaltion adjustment may have as good a chance as the standard 4/3.5. Jeezum when I'm in my 80's just having a good cup of coffee and be able to read the newspaper will be a good day. A friend of mine clued me in along time ago about life in retirement. " There are 3 phases of retirement, 60-70 the go-go years. 70-80 the slow go years. 80-90 the no go years. Then your dead.

What works and doesn't work allocation wise changes also. EM's seem's to have replaced REITS, and Mid Cap has replaced Small cap as spice to the porfolio. I have been watching VG wellington funds allocation. They stand 30% bonds 12% Intl rest US. They are conservitive. VG Asset Allocation is 100% stocks. One will never know what the "best SWR , allocation" will be for the next 30 years , until about 40 years from now. There are "zones" you can be in, but to say 4-4.5% is do or die .. /shrug.

The one thing that I do agree on is the first 3-5 years of a portfolio in retirement is critical. I kinda of see it , esp going on my own, as being in college and away from home for the first time. Study hard, don't party/play too much and you'll graduate, and have more options.

Think i'm ranting a bit here .. but one think I think folks have to remember are that SWR rules should be taken as guides, not as a law of nature. ...

Christopher

73ss454 · 01-04-2006, 11:48 PM

Chris,

I don't think that ESRBob meant that anything is written in stone. All assumptions are based on the past not the future.

ESRBob · 01-06-2006, 10:56 PM

Chris,
Good points... part of the fun of being here will be to talk about asset allocation changes over the years. Even though I use precise percentages in the book, I tried to caveat that asset allcoations are pretty flexible and open to personal preferences. As for the SWR, I only advise the 4-4.5% for the years you are in ER. At the time of 'real retirement' then we'll be able to go to the many calculators which allow higher SWRs and a probability of spending down capital. One thing to remember: although my Dad is 90, he just doubled his and Mom's annual spending by checking into the nursing home, so even the no-go-90s can be expensive!

Not everyone accepts the methodology or value of Safe Withdrawal Rates and you can find plenty of threads here from people who think its all a bit neurotic or at least error-prone. The way I see it, the 4-4.5% is designed to get you through the tougher times history has thrown at us, (like 1965-95). Chances are good (10-to-1 or so) that we'll have better market performance and then we, too, can spend our 70s filling up the cruise ships, buying second homes in Puerto Vallarta, buying into the fancy gated communities and giving ourselves new Lexuses every few years (and paying for grandkids college tuition and funding favorite charities) like a lot of our parents' generation is doing now. Looking forward to it... sure hope it works out that way!

Sheryl · 01-07-2006, 11:20 AM

Quote:

Originally Posted by Chris24

A friend of mine clued me in along time ago about life in retirement. " There are 3 phases of retirement, 60-70 the go-go years. 70-80 the slow go years. 80-90 the no go years. Then your dead.

Christopher

This hit home for me this morning in a new way. I was listening to a story on NPR about people in a nursing home - they were in their earlly 90's. If the physical problems didn't get them, the mental deterioration did. Some few folks are going to be lucky enough to have something of an active life in the 90's but I think the majority of us will be at best enjoying a cup of coffee and a good book.

Even though I consider myself as at the halfway point of my life (45) I'm going to have to keep remembering that there are only 20 or so years left to enjoy more active persuits.

. . . Yrs to Go · 01-07-2006, 11:34 AM

Quote:

Originally Posted by Sheryl

This hit home for me this morning in a new way.* I was listening to a story on NPR about people in a nursing home - they were in their earlly 90's. If the physical problems didn't get them, the mental deterioration did.* *Some few folks are going to be lucky enough to have something of an active life in the 90's but I think the majority of us will be at best enjoying a cup of coffee and a good book.* *

Even though I consider myself as at the halfway point of my life (45) I'm going to have to keep remembering that there are only 20 or so years left to enjoy more active persuits.

I thought of this while visiting my 80+ year old grand parent in-laws over the holidays. Most expenses will go way down at some point as we age . . . medical expenses are another story.

I don't plan on factoring this into my calculations though. It seems like an exercise in trying to fit the numbers to the desired result, which may turn out to be a bit too clever in the unfortunate end. As a theoretical point it does help me get more comfortable with the FireCalc methodology in that the inflation adjustments incorporated into the calculation may be too high in the final years of any forecast period.

Sheryl · 01-07-2006, 11:43 AM

Quote:

Originally Posted by . . . Yrs to Go

I thought of this while visiting my 80+ year old grand parent in-laws over the holidays.* Most expenses will go way down at some point as we age . . . medical expenses are another story.*

I don't plan on factoring this into my calculations though.* It seems like an exercise in trying to fit the numbers to the desired result, which may turn out to be a bit too clever in the unfortunate end.* As a theoretical point it does help me get more comfortable with the FireCalc methodology in that the inflation adjustments incorporated into the calculation may be too high in the final years of any forecast period.

I had intended to comment on this in my post too...* as expenses for outside activities dwindle, the nursing home cost skyrockets, I'm intuitively assuming they cancel out... an assumption that will have to be tested and possibly modified in the next 25-30 years.* There are just too many unknowns right now.*

I have generally decided to opt out of LTC insurance, and count on a big enough portfolio - but we have a LTC salesman coming in to make a pitch at the office Monday - I will be interested to see if I change my mind.

. . . Yrs to Go · 01-07-2006, 11:49 AM

Quote:

Originally Posted by Sheryl

I have generally decided to opt out of LTC insurance, and count on a big enough portfolio - but we have a LTC salesman coming in to make a pitch at the office Monday - I will be interested to see if I change my mind.

At 34 LTC insurance is something that is way out on the horizon for me. But after seeing the $10,000 per month expenses my grandfather racked up last year I began to think about what would happen if my wife or I needed LTC for an extended period. It could devastate an otherwise healthy financial situation for the surviving spouse.

nellieb · 01-07-2006, 12:06 PM

How does someone rack up $10000.00 per month in LTC.

73ss454 · 01-07-2006, 01:34 PM

Quote:

Originally Posted by nellieb

How does someone rack up $10000.00 per month in LTC.

I would say that's about the going # today. At least in NY

01-02-2006, 10:22 AM	#1
brewer12345 Give me a museum and I'll fill it. (Picasso) Give me a forum ... Join Date: Mar 2003 Posts: 9,226	Question on ESRBob's withdrawal method One thing I didn't see in the book (which I think is excellent, BTW), was much commentary on how the 4%/95% methodology fared in a stagflationary environment. Clearly the value of the portfolio was relatively well sustained, but after several years of an ugly environment, what did the proverbial 1966 retiree's inflation-adjusted income look like? Was it so severely degraded by several "95% years" that their real income essentially forced them back to work full time (or eating cat food)? __________________ “When you realize that you are one of the rare few who observe moral principles in their relationships with others, there is a temptation to sink into amorality, not out of conviction or pleasure but simply to avoid further pain, because there is no greater suffering than being an angel in hell, whereas a devil feels at home wherever he goes.” – Martin Page, How I Became Stupid

01-03-2006, 07:24 PM	#2
ESRBob Thinks s/he gets paid by the post Join Date: Mar 2004 Posts: 1,278	Re: Question on ESRBob's withdrawal method Brewer, Great question. I pulled up the old file (which I would be happy to send to anyone, btw -- it is an excel attachment -- PM me with your email address or email me at bob@workless-livemore.com). Turns out the going got rough but not to the point of cat-food eating. During the tough years starting in 1966, the bottome point was hit in 1974-- where the nominal value of the portfolio was the same in 1974 as it had been in 1966, and in inflation -adjusted terms it was down 35%. (Meaning your real withdrawal was about 35% lower that year than it had been.) The 95% Rule had 'kicked in' 5 times by 1975, giving you an extra percent or so of withdrawal in each of those years in order to ensure you had at least 95% as much income each year as you had the year before. Inflation was the killer, though, eroding spending power. That is how you got down to a real withdrawal 35% lower than you started with 10 years earlier. So while the adjustment was gradual, it was not trivial. This was the perfect time for a combination of belt-tightening, part time work and deep philosophy about the meaning of disposable income. But by staying the course and sweating out those bad years, you ended up with a portfolio 30 years later that was close to 50% up in real terms. Note that during these years the traditional 4% withdrawal methods with inflation adjustments all either crashed and burned (anything with less than 50% stock) or still ended up well below the initial portfolio value in real terms. So, in a stagflation environment, retirees, especially ERs, wanting to live off a Safe Withdrawal Rate method have to do something different -- they either use a a regular stepwise adjustment like the 95% Rule or they go bust (or get seriously, possibly irreversibly depleted)-- you can't have it all during periods like 1966-1996. Let's hope we arent' facing another period like that, but if we are (and you never know until years later), then the 95% Rule with belt-tightening and a bit of spare income on the side will see you through, at least as long as it doesn't get any worse than the 17 long lean years following 1966.... Oops, got to get off to my tennis game! __________________ ER for 8 years; living off 4.3% of savings (and a few book royalties ;-)

01-04-2006, 07:18 AM	#4
brewer12345 Give me a museum and I'll fill it. (Picasso) Give me a forum ... Join Date: Mar 2003 Posts: 9,226	Re: Question on ESRBob's withdrawal method Thanks for the answer, Bob. I will e-mail you for the data. FWIW, I don't think that that invalidates the withdrawal methodology at all. It does make me believe that the retiree who chooses that strategy had either better have an alternate source of income or a very flexible budget. I wonder how the same hypothetical retiree would have fared with a portfolio holding an 8 or 10% allocation of commodities (PCRIX or similar)? Guess we would have to go through another ugly period like that to find out. __________________ “When you realize that you are one of the rare few who observe moral principles in their relationships with others, there is a temptation to sink into amorality, not out of conviction or pleasure but simply to avoid further pain, because there is no greater suffering than being an angel in hell, whereas a devil feels at home wherever he goes.” – Martin Page, How I Became Stupid

01-04-2006, 12:22 PM	#6
brewer12345 Give me a museum and I'll fill it. (Picasso) Give me a forum ... Join Date: Mar 2003 Posts: 9,226	Re: Question on ESRBob's withdrawal method Yeah, Bob, I like the 4%/95% methodology better than the "set and forget 4%" method. However, it pays to understand what you are getting into when you plan on depending on your portfolio for income. Like I said, the 4%/95% method is probably best suited to those with very flexible expenses or wh are still working PT and can ramp up their earnings relatively easily. __________________ “When you realize that you are one of the rare few who observe moral principles in their relationships with others, there is a temptation to sink into amorality, not out of conviction or pleasure but simply to avoid further pain, because there is no greater suffering than being an angel in hell, whereas a devil feels at home wherever he goes.” – Martin Page, How I Became Stupid

01-04-2006, 12:32 PM	#7
jug Recycles dryer sheets Join Date: Nov 2005 Posts: 119	Re: Question on ESRBob's withdrawal method Regarding this particular topic about allocation and SWR, I went to my fidelity guy last week, he took my numbers, and said he will run all sorts of scenarios on his puter and get back to me. Its too bad we have to worry about money, but in reality, I dont think many who have ER'd do since the lifespans we anticipate do not work out for many of us, and we do sort of scale back as we got older. Most well heeled older folk did pretty well and died with a bundle.* Ive seen few cases where the money actually ran out. This is very evident by the amount of senior rushing to Atlantic City each day, they seem to have the disposible income, they come with little oxygen tanks and all. Live it up, its probably later than we think.. My wife just coined a new phrase for ER, she told our son to go bug off and get out on his own, he is 27, and not 100% independent. She told him that she just formed a new club "Seniors gone wild"* She's 52 and IM 53 and we are rebelling against our ungratefull children. Break out the prune juice L'chaim!!! jug

01-04-2006, 06:44 PM	#10
unclemick Give me a museum and I'll fill it. (Picasso) Give me a forum ... Join Date: Jul 2003 Location: north of Kansas City Posts: 5,527	Re: Question on ESRBob's withdrawal method Hmmm Memory says - the dismal stock performance early in the period caused a lot of retiree's to go CD's, MM and other fixed instruments. I believe even in the 80's - the Terhorst's started that way. Luckily - I was working so I DCA'd through the entire 18 yr flat period. A period of stagflation will require - unfogging the old memory banks. TIP's, Inflation protected securities, and the number of foreign market instruments weren't around or less availible then. Wellesley, VG Trustee's co-mingled International, VG PM, and some timberland come to mind - also Homestake, Anasarco and a few other mining stocks. Alas - now a days - a Boglehead balanced indexer - pretty much. P.S. - I just take the divs/interest and try to be happy. Worry is optional.

01-04-2006, 11:42 PM	#11
Chris24 Recycles dryer sheets Join Date: Mar 2005 Posts: 75	Re: Question on ESRBob's withdrawal method ESRBOB. I have read your book, and also bought a few other for Christmas presents. One thing that bugs me about SWR is everything is predicated on a set infaltion rate and allocations Looking in the past. My feelings are they are a good guide, but not set in stone. When one retires, spending habits, costs change. I think there was a thread not too long ago about personal inflation rates. 6% withdrawl rate with a a set 2% for infaltion adjustment may have as good a chance as the standard 4/3.5. Jeezum when I'm in my 80's just having a good cup of coffee and be able to read the newspaper will be a good day. A friend of mine clued me in along time ago about life in retirement. " There are 3 phases of retirement, 60-70 the go-go years. 70-80 the slow go years. 80-90 the no go years. Then your dead. What works and doesn't work allocation wise changes also. EM's seem's to have replaced REITS, and Mid Cap has replaced Small cap as spice to the porfolio. I have been watching VG wellington funds allocation. They stand 30% bonds 12% Intl rest US. They are conservitive. VG Asset Allocation is 100% stocks. One will never know what the "best SWR , allocation" will be for the next 30 years , until about 40 years from now. There are "zones" you can be in, but to say 4-4.5% is do or die .. /shrug. The one thing that I do agree on is the first 3-5 years of a portfolio in retirement is critical. I kinda of see it , esp going on my own, as being in college and away from home for the first time. Study hard, don't party/play too much and you'll graduate, and have more options. Think i'm ranting a bit here .. but one think I think folks have to remember are that SWR rules should be taken as guides, not as a law of nature. ... Christopher

01-04-2006, 11:48 PM	#12
73ss454 Thinks s/he gets paid by the post Join Date: Oct 2004 Posts: 1,753	Re: Question on ESRBob's withdrawal method Chris, I don't think that ESRBob meant that anything is written in stone. All assumptions are based on the past not the future.

01-06-2006, 10:56 PM	#13
ESRBob Thinks s/he gets paid by the post Join Date: Mar 2004 Posts: 1,278	Re: Question on ESRBob's withdrawal method Chris, Good points... part of the fun of being here will be to talk about asset allocation changes over the years. Even though I use precise percentages in the book, I tried to caveat that asset allcoations are pretty flexible and open to personal preferences. As for the SWR, I only advise the 4-4.5% for the years you are in ER. At the time of 'real retirement' then we'll be able to go to the many calculators which allow higher SWRs and a probability of spending down capital. One thing to remember: although my Dad is 90, he just doubled his and Mom's annual spending by checking into the nursing home, so even the no-go-90s can be expensive! Not everyone accepts the methodology or value of Safe Withdrawal Rates and you can find plenty of threads here from people who think its all a bit neurotic or at least error-prone. The way I see it, the 4-4.5% is designed to get you through the tougher times history has thrown at us, (like 1965-95). Chances are good (10-to-1 or so) that we'll have better market performance and then we, too, can spend our 70s filling up the cruise ships, buying second homes in Puerto Vallarta, buying into the fancy gated communities and giving ourselves new Lexuses every few years (and paying for grandkids college tuition and funding favorite charities) like a lot of our parents' generation is doing now. Looking forward to it... sure hope it works out that way! __________________ ER for 8 years; living off 4.3% of savings (and a few book royalties ;-)

01-07-2006, 12:06 PM	#18
nellieb Dryer sheet wannabe Join Date: Aug 2005 Posts: 21	Re: Question on ESRBob's withdrawal method How does someone rack up $10000.00 per month in LTC.