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View Poll Results: Which of the statements below best describes your RE portfolio goals?
Capital preservation is my primary goal. Income from dividend and interest income is my secondary goal. (This implies that the portfolio is sufficiently large that withdrawals will not exceed yield, or that there is another source of income.) 16 17.39%
Capital preservation is my primary goal for the first few years. After that, my primary goal will change to income generation. (This retiree either has a cash "bucket" or part time w*rk) 17 18.48%
Income generation is my primary goal from Day 1. My capital may be partly depleted over time, but I hope to have some residual capital to leave as a legacy. 21 22.83%
Income generation is my primary goal from Day 1. My capital may be partly depleted over time, but I want to keep enough to purchase an annuity at a later date. 1 1.09%
Income generation is my primary goal. I am also hoping for some capital appreciation for the first X years. (This implies that expected portfolio yield exceeds income requirements early in retirement; this portfolio is probably large.) 19 20.65%
I have retirement income sufficient to meet my needs independent from my portfolio, which I can spend, or not, at my discretion. (This retiree has a COLA'd pension and healthcare is covered). 18 19.57%
Voters: 92. You may not vote on this poll

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Old 04-18-2010, 08:59 PM   #21
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Thanks for the explanation Audrey. In other words, people who focus only on SWR alone will not care whether the SWR comes from dividends, interest or capital. Now I get it.
Yep. It's also known as a Total Return approach.

With the SWR method, you choose the AA based on the how long you need the portfolio to last and the desired withdrawal rate.

Then, once a year you withdraw that percent from the portfolio, selling whatever assets might be necessary, and then rebalance to the original AA.

I think there are probably quite a few folks on this forum using this "pure SWR" method.

Audrey
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Old 04-18-2010, 10:31 PM   #22
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Plan A is to maintain the real value of my portfolio indefinitely and live of less than 100% of the income.

Number 1 is the best fit.
While this is a valid plan very few can retire early with such an approach.

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Old 04-18-2010, 10:35 PM   #23
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+1 to Audrey and Coach.

- While not retired yet my plan is based on total return of a diversified portfolio and a WR of 3.5%

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Old 04-18-2010, 10:37 PM   #24
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While this is a valid plan very few can retire early with such an approach.

DD
I dunno - - if you define retire early as "before age 65" I'll bet a lot of our members could do it, especially the more frugal members. Think of the discussions of re-using plastic bags and the lowest monthly cell phone costs, not to mention food budgets. With expenditures as low as they are for some, I am also sometimes amazed at the size of portfolios our members have. I am sure mine (which seems big to me) is small compared with most here.
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Old 04-19-2010, 09:00 AM   #25
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The SWR method does not rely on income from a portfolio. It is based on the total return (both income AND cap gains together) for each given AA over several decades based on historical data.

And the SWR method does not seek to preserve principal, but instead expects to spend principal down in some cases, even if temporarily. Instead you pick an SWR and AA that has a high chance of the portfolio not going to 0 before a certain number of decades has passed.
I follow this method and agree to a degree but...

Quote:
Note that this also means - "I don't care about capital preservation, nor do I care what income is generated by the portfolio."
I don't actually agree with the above. I suspect many of us choose this approach as a reasonable way to get at a safe income stream over the course of retirement. I also suspect that many of us (I include myself in this group) are prepared to adjust our approach, scaling back if necessary if we find ourselves on a course that takes us far toward portfolio exhaustion. For me that is one of those artsy "I will know it when I see it situations." I am not pre-planning a specific point that I would start scaling back and am not worried that I need to.

Bottom line is I would like to leave a substantial nest egg to my kids if possible but I am not going to start living small at my tender age to do so. I will risk going down and sorta plan on scaling back when I am older if necessary.

I chose #3: Income generation is my primary goal from Day 1. My capital may be partly depleted over time, but I hope to have some residual capital to leave as a legacy.
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Old 04-19-2010, 10:09 AM   #26
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What does "safe income stream" mean? That has nothing to do with the safe withdrawal rate.

Using an SWR method doesn't mean you can't scale back if you like. Yes the traditional SWR just continues adjusting withdrawals for inflation without looking at market conditions. Some years can cause large draws, but historically, this method has worked over pretty long periods with success as long as your withdrawal rate is not too big and you have an appropriate AA. That was the point of developing the method.

The Bob Clyatt/95% method and the fixed % SWR are both methods that provide a way to scale back and, depending on how long the portfolio has been growing and how bad a bear market we just had, might result in a temporary drop in the portfolio value below where started. Historically, you have a good chance of recovering as long as your rate and AA are appropriate.

Even on a "dividend/interest" income only portfolio there are issues. The income stream is not necessarily guaranteed (you would need an annuity). Your portfolio value can drop significantly due to a bear market. The dividend/interest investor may say that they don't care, but what if the dividend income starts to drop? And the interest income paid by the bond funds start to drop? If you own individual bonds and CDs you might not be able to find new issues with sufficient yield when you roll over. We have been seeing all of these recently. There can be big fluctuations in the income generated by a portfolio. And I think folks trying to optimize for income generation can make themselves vulnerable to future inflation, because they tend to reduce the equity allocation too much in order to increase the yield of the portfolio and interest income generated by bonds does not growth with inflation.

IMO - total return is far easier to implement (and more tax efficient for taxable investments). But apparently I am in the minority?

Audrey
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Old 04-19-2010, 10:17 AM   #27
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I did not like the choices for 2 reasons

1) I am not retired yet, so I guessed at my goal
2) the goals can be more than one of listed choices.

I want capital preservation, dividends, and portfolio appreciation all at same time

I chose this

Quote:
Income generation is my primary goal. I am also hoping for some capital appreciation for the first X years. (This implies that expected portfolio yield exceeds income requirements early in retirement; this portfolio is probably large.)
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Old 04-19-2010, 10:24 AM   #28
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Originally Posted by audreyh1 View Post
What does "safe income stream" mean? That has nothing to do with the safe withdrawal rate.

IMO - total return is far easier to implement (and more tax efficient for taxable investments). But apparently I am in the minority?

Audrey
I used the "safe income stream" phrase inappropriately. I should have said something like a "relatively likely to succeed income stream based on historical precedents" or something.

On the total return issue, I certainly agree. Based on the comments I have seen around the forum I would guess that the majority lean that way. Have we ever had a poll on that topic?
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Old 04-19-2010, 10:27 AM   #29
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I did not like the choices for 2 reasons

1) I am not retired yet, so I guessed at my goal
2) the goals can be more than one of listed choices.

I want capital preservation, dividends, and portfolio appreciation all at same time

I chose this

Same scenario here- I chose #5, it was the closest available match. (#4 was actually closer, but the annuity clause killed it for me.)
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Old 04-19-2010, 10:37 AM   #30
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Originally Posted by audreyh1 View Post
What does "safe income stream" mean? That has nothing to do with the safe withdrawal rate.

Using an SWR method doesn't mean you can't scale back if you like. Yes the traditional SWR just continues adjusting withdrawals for inflation without looking at market conditions. Some years can cause large draws, but historically, this method has worked over pretty long periods with success as long as your withdrawal rate is not too big and you have an appropriate AA. That was the point of developing the method.

The Bob Clyatt/95% method and the fixed % SWR are both methods that provide a way to scale back and, depending on how long the portfolio has been growing and how bad a bear market we just had, might result in a temporary drop in the portfolio value below where started. Historically, you have a good chance of recovering as long as your rate and AA are appropriate.

Even on a "dividend/interest" income only portfolio there are issues. The income stream is not necessarily guaranteed (you would need an annuity). Your portfolio value can drop significantly due to a bear market. The dividend/interest investor may say that they don't care, but what if the dividend income starts to drop? And the interest income paid by the bond funds start to drop? If you own individual bonds and CDs you might not be able to find new issues with sufficient yield when you roll over. We have been seeing all of these recently. There can be big fluctuations in the income generated by a portfolio. And I think folks trying to optimize for income generation can make themselves vulnerable to future inflation, because they tend to reduce the equity allocation too much in order to increase the yield of the portfolio and interest income generated by bonds does not growth with inflation.

IMO - total return is far easier to implement (and more tax efficient for taxable investments). But apparently I am in the minority?

Audrey
Fantastic post. Thank you. I am still learning but this really helps me understand the various approaches. As mentioned in other posts I intend to spend only dividends (3.25%) from my 100% equity portfolio. I acknowledge the risks you mention here but feel very confdent that these risks will not bite me. Also, this strategy is more or less in agreement with a conservative Trinity SWR in any event. I think that if my portfolio performs well I will splurge on some extravagant purchase Ferrari/Villa/Yacht eventually.
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Old 04-19-2010, 10:40 AM   #31
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It was kind of strange when we were setting up our revocable trust. The surviving spouse had rights to the "income" thrown off by the trust after the first spouse died. No one seemed to be able to allow for something like a 4% withdrawal rate that actually sold some shares. So if the trust kicks in we might actully have to switch the portfolio to investments that generate income instead of trying to maximize total return. "Income" for retirement was practically a global assumption that only seems to be changing with the advent of SWR studies.
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Old 04-19-2010, 10:47 AM   #32
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While this is a valid plan very few can retire early with such an approach.

DD
Clyatt's 4%/95% approach aims to preserve the real value of the portfolio over 40 year periods. I think his books says that it did this some 90+% of the time, and most failures were close to maintaining the purchasing power of the original portfolio.

I use the total return approach as advocated by Bengen, the Trinity study & others. However, I use a constant percentage of portfolio (4%) rather than automatic adjustments for inflation.
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Old 04-19-2010, 11:23 AM   #33
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Clyatt's 4%/95% approach aims to preserve the real value of the portfolio over 40 year periods. I think his books says that it did this some 90+% of the time, and most failures were close to maintaining the purchasing power of the original portfolio.

I use the total return approach as advocated by Bengen, the Trinity study & others. However, I use a constant percentage of portfolio (4%) rather than automatic adjustments for inflation.
That post was directed at choice #1 in the poll where the poster stated that was their strategy and they planned on living on less than 100% of the income stream. That would require more on the order of a 2.0-2.5% WR - in other words a much larger starting portfolio than someone planning on 3-4%.

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Old 04-19-2010, 11:28 AM   #34
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I dunno - - if you define retire early as "before age 65" I'll bet a lot of our members could do it, especially the more frugal members. Think of the discussions of re-using plastic bags and the lowest monthly cell phone costs, not to mention food budgets. With expenditures as low as they are for some, I am also sometimes amazed at the size of portfolios our members have. I am sure mine (which seems big to me) is small compared with most here.
I agree - there is a select population here of LBYM experts. It still would take them longer to retire then if they went with a 4% SWR and for most people it would never be an option. The 4% implies a portfolio of about 25X annual expenses, choice one is more around 40X.

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Old 04-19-2010, 11:37 AM   #35
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In a paper about withdrawal strategies (recommended by LOL!) , Vanguard says
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It’s important to note, however, that under the total-return approach, the income generated by the portfolio is the first source tapped to meet spending needs, and only when this source is insufficient does the investor liquidate some holdings. As a result, in situations when the total portfolio cash flow is more than the annual spending requirement, the total-return approach is equivalent to the income approach.
https://institutional.vanguard.com/i...P_TotalRet.pdf

And that is what we did after the big crash. We cut expenses down to where we could (almost) live off dividends. Perhaps we over-reacted, but we slept very well.
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Old 04-19-2010, 05:26 PM   #36
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Glad I didn't attempt the poll, hard to get it right for everybody. And I did not learn what I had hoped to, but I suspect my question has more answers than I was hoping for. I am an SWR, adjust along the way, die broke advocate (knowing that's not possible).
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Old 04-20-2010, 08:34 AM   #37
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My intention was to spend more than the returns (which includes interest, dividends, and cap gains) in the early years, so principal would decrease. I figured I had some travel to catch up on.

Then, slow spending to about the level of the total return as I got older. The remaining principal might be chewed up at the end due to medical expenses, or it might be left to the kids.
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Old 04-20-2010, 09:18 AM   #38
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I'm not really asking for "OTHER" - I'm pointing out that the Trinity Study type SWR model is missing from the poll, and IMO that is a pretty huge omission.

Audrey
Actually, that's not a problem (for somebody like me). Since I retired before the traditional age (let's just say before 62), I'm currently using more than the "magic 4%" and will do so for the next 7+ years (till I draw SS).

My DW/me will have four additional income sources (we're the same age) coming on-line over that period of time. However, at age 70, our portfolio withdrawl rate drops to 1.25% and is not forecast to exceed 4% till the end of our plan (age 100 or our death - whatever occurs first).

The 4% target is probably OK to use, but only for those that 100% of their income sources on-line the day they retire...
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Old 04-20-2010, 02:24 PM   #39
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It was kind of strange when we were setting up our revocable trust. The surviving spouse had rights to the "income" thrown off by the trust after the first spouse died. No one seemed to be able to allow for something like a 4% withdrawal rate that actually sold some shares. So if the trust kicks in we might actully have to switch the portfolio to investments that generate income instead of trying to maximize total return. "Income" for retirement was practically a global assumption that only seems to be changing with the advent of SWR studies.
That seems kind of odd. My parents' revocable trust specified that principal could be disbursed if needed for xxx (it specified some conditions - living, education, financial harship, medical I think). Maybe it depends on the state.
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Old 04-20-2010, 04:25 PM   #40
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I picked the last option. It's a direct result of our LBYM lifestyle (cheap bastardhood), and the pensions and ssan we accumulated over the years. Anyway, we still save/invest using part of our pensions. We owe nothing, no house or car payments, no debts, period. As to the poll, Capital and Income preservation make me happy. I have become even more conservative, thanks to the recent economic mess. I try to follow Bogle's formula; have your age (67 next month) in bonds.
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