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Old 11-09-2008, 10:23 AM   #1
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Reverse SWR

I know the idea of a 4% SWR is to have confidence that you will never run out of money. What if my goal is to draw the maximum amount possible from my portfolio while trying to ensure that it lasts 10-11 years. The goal would be to maximize withdrawals and run out of money in 10-11 years.

Is there some type of formula I can use to do this? I know I could do something like build a 10 year CD ladder and just spend one rung every year, but I'd like as much growth as possible just like a standard retirement allocation.
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Old 11-09-2008, 10:35 AM   #2
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I know the idea of a 4% SWR is to have confidence that you will never run out of money. What if my goal is to draw the maximum amount possible from my portfolio while trying to ensure that it lasts 10-11 years. The goal would be to maximize withdrawals and run out of money in 10-11 years.

Is there some type of formula I can use to do this? I know I could do something like build a 10 year CD ladder and just spend one rung every year, but I'd like as much growth as possible just like a standard retirement allocation.
Well, we have just seen that ten year total return can be on the order of 0 , with great volatility, and we aren't necessarily done yet.

So I would say that if for some reason you really want to do this, you have to go with an annuity or a cd ladder, or a high quality bond ladder.

Are you expecting The Rapture in 10 years?

Ha
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Old 11-09-2008, 10:48 AM   #3
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ORP may help with the numbers. Optimal Retirement Calculator and Retirement Decision Support System
Problem is that ORP uses straight line projections for investment returns, so projecting through a period as short as ten years could be very inaccurate for anything but fixed income. To get growth you will have to take on risk, and one of the risks is that you run out of money long before you had planned to.

What about an immediate annuity?
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Old 11-09-2008, 10:51 AM   #4
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Since you will need the money in less than 10 years, the money should be invested very conservatively (CDs....) and therefore your real returns will probably be near zero. So if I were you, I would just divide the nest egg into 10 or 11 identical buckets (CD ladder) and use one bucket per year to cover my expenses. Simple, low risk, guaranteed outcome. Why make it more complicated?
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Old 11-09-2008, 12:01 PM   #5
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Old 11-09-2008, 12:08 PM   #6
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I'd do something like an IRA RMD. Take 1/10 the first year, 1/9 the second and so on. You could adjust for a cost of living adjusted stream if needed.

An immediate annuity makes a lot of sense. But you can see what FireCalc says for 10 year periods with various stock/bond splits and about a 10% first year withdrawal.
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Old 11-09-2008, 02:16 PM   #7
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What if my goal is to draw the maximum amount possible from my portfolio while trying to ensure that it lasts 10-11 years. The goal would be to maximize withdrawals and run out of money in 10-11 years.
10 years? Not meant to be light in any way - do you have a terminal illness?
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Old 11-09-2008, 02:55 PM   #8
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Luckily, No, I dont have a terminal illness. At least not that I know of. My wife and I (who both work at the same place) have COLA'd pensions. Part of the pension plan is a provision that allows us to have the pension payments paid into an interest bearing account that draws a guaranteed 8-10% interest based on the last 10 years avg returns of the pension fund. The interest currently sits at 9.75% and can only change .25% per year.

So my plan is to retire and have all of our pension checks paid into this "DROP" account from the day we retire. We will live off of our investments and not touch the pension or the DROP account until the investment accounts run out. At that point we will start collecting our pension payments plus be able to draw the interest from the DROP accounts forever and it will amount to having a permanent CD ladder paying 8-10% interest. We will have no stock market exposure at that point and will never have to touch the money in the DROP account which will pass on to our heirs.

So the question is how to structure the projected $1.3M - $1.5M that we will have in our portfolio at retirement to be able to draw the maximum amount possible knowing that it will run out in 10 years or so?

For round numbers, lets say I have $1.5M. I could:

a) stick it all in CDs averaging 5% and be able to draw about 12% I believe....about $180,000
b) use some other AA and hope for at least a little growth and be able to draw a bit more. In this case if the market doesnt cooperate, its no major catastrophe. I may run out of money a year or 2 early but its not like that means Im broke. It just means I have to got to phase 2 of my retirement plan earlier that planned.
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Old 11-09-2008, 03:23 PM   #9
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That's what I would do:

Keep $150K for year 1 expenses
Buy 2 $150K 1 year CDs: 1 CD will pay for year 2 expenses, the second CD gets rolled over into a 5 year CD and pays for year 7 expenses.
Buy 2 $150K 2 year CDs: 1 CD will pay for year 3 expenses, the second CD gets rolled over into a 5 year CD and pays for year 8 expenses.
Buy 2 $150K 3 year CDs: 1 CD will pay for year 3 expenses, the second CD gets rolled over into a 5 year CD and pays for year 9 expenses.
Buy 2 $150K 4 year CDs: 1 CD will pay for year 4 expenses, the second CD gets rolled over into a 5 year CD and pays for year 10 expenses.
Buy 1 $150K 5 year CDs to pay for year 5 expenses.

Why take any market risk with that money or make it more complicated than it has to be?
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Old 11-09-2008, 04:54 PM   #10
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[quote=utrecht;744850]My wife and I (who both work at the same place) have COLA'd pensions. Part of the pension plan is a provision that allows us to have the pension payments paid into an interest bearing account that draws a guaranteed 8-10% interest based on the last 10 years avg returns of the pension fund. The interest currently sits at 9.75% and can only change .25% per year.
/quote]


And what is the survivor benefit on these pensions ?
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Old 11-09-2008, 06:52 PM   #11
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Survivor benefits are 50% for either spouse.
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Old 11-09-2008, 06:52 PM   #12
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Luckily, No, I dont have a terminal illness. At least not that I know of. My wife and I (who both work at the same place) have COLA'd pensions. Part of the pension plan is a provision that allows us to have the pension payments paid into an interest bearing account that draws a guaranteed 8-10% interest based on the last 10 years avg returns of the pension fund. The interest currently sits at 9.75% and can only change .25% per year.

So my plan is to retire and have all of our pension checks paid into this "DROP" account from the day we retire. We will live off of our investments and not touch the pension or the DROP account until the investment accounts run out. At that point we will start collecting our pension payments plus be able to draw the interest from the DROP accounts forever and it will amount to having a permanent CD ladder paying 8-10% interest. We will have no stock market exposure at that point and will never have to touch the money in the DROP account which will pass on to our heirs.

So the question is how to structure the projected $1.3M - $1.5M that we will have in our portfolio at retirement to be able to draw the maximum amount possible knowing that it will run out in 10 years or so?

For round numbers, lets say I have $1.5M. I could:

a) stick it all in CDs averaging 5% and be able to draw about 12% I believe....about $180,000
b) use some other AA and hope for at least a little growth and be able to draw a bit more. In this case if the market doesnt cooperate, its no major catastrophe. I may run out of money a year or 2 early but its not like that means Im broke. It just means I have to got to phase 2 of my retirement plan earlier that planned.
I don't know who (what company/municipality/state, etc.) is backing these pensions but I'd be a bit wary of trusting that they will be there in their entirety as you describe since they sound a bit too good to be true to me. In light of future uncertainty for any given company and even for a government pension, I'd sure be reticent about planning to spend all my portfolio down trusting that the pension would still be there.

It sure sounds like a sweet deal, but it may not work out as described. A lot of companies and municipalities have over-promised on pensions, if you ask me.

Just something to consider.
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Old 11-09-2008, 08:23 PM   #13
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I would agree with Gardnr, and would take the pensions sooner rather than later, for that reason. I would also invest in a conventional portfolio to supplement the pensions. But then, I tend to be more cautious than most.

I would only wait to take the pensions if you could live off the portfolio alone easily, right now. In that case I would invest in something not too exciting, like Wellesley, and live off the dividends only while waiting for the pensions. Then the pensions would be just extra spending money when they come along. You would still have your portfolio.
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Old 11-09-2008, 08:37 PM   #14
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This "DROP" thang--is it insured by the government in any way? Is it run by/is the cash accessible to your employer?

Though I don't know the specifics of your situation, it sounds like you could be taking on a big amount of single-point risk to avoid the more diffuse (and controllable) risk of exposure to equities.
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Old 11-09-2008, 09:35 PM   #15
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Are your pensions tied to your health care ? If so I would opt for the pensions now or at least one of them and invest the other money . Too many pensions are changing or modifying benefits to trust them ten years in the future .
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Old 11-09-2008, 10:04 PM   #16
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We are Dallas police officers. This is the Dallas Police and Fire Pension which is one of the strongest pension funds in the country.

Its not a matter of opting for the pensions now or later. We are collecting our pensions either way, but we can choose not have the pension payments paid to us but instead paid into the DROP account which is still our property and can never be taken away. I guess they could change the rules at some point and not guarantee the 8-10% interest in which case I could roll the entire DROP account balances into IRAs. Basically all we are doing is depositing our pension checks into a savings account that happens to pay a high amount of interest. Its totally safe and it doesnt hurt the pension fund to pay that high interest since its based on the avg returns of the previos 10 years. I guess if the pension funds returns were horrible for like 20 years (lets say returns were flat over 20 years) but they still had to pay out the minimum 8%, then they might have to change the rules, but even then I doubt it. The amount of total money in the all pensioneers DROP accounts is a very small portion of the total pension fund. Most people dont use the DROP accounts like we plan to. Most people "retire" for pension purposes but continue to work for a few more years so they can draw their normal salary all the while having their pension checks paid into the DROP accounts. Then a few years later they actually quit working and start drawing their pensions and drawdown their DROP account.

Neither the pension, nor the DROP accounts have anything to do with our health care benefits. We have health care thru the city even as retirees (although the retiree prices for health care arent all that great).

Another option if I was to assume that the DROP account was risky in some way would be to have 1/2 of the pension check paid into the DROP account and the other 1/2 paid to me and I could invest it in something. That still wouldnt really change my plan of drawing down my 457 and other investment accounts and allowing them to run out. It would just change the time frame.
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Old 11-09-2008, 10:11 PM   #17
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This "DROP" thang--is it insured by the government in any way? Is it run by/is the cash accessible to your employer?

Though I don't know the specifics of your situation, it sounds like you could be taking on a big amount of single-point risk to avoid the more diffuse (and controllable) risk of exposure to equities.
A couple years ago the City talked about wanting to have access to the pension money. Its several billion $$. The Pension fund quickly got a new law on the ballot to prevent them from touching it in any way. The law went to the voters and passed something like 91%-9%
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Old 11-10-2008, 02:55 AM   #18
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Utrecht, IIRC you discussed your pension plan when you first joined the board.

My comments at the time, was that it seemed almost to good to be true, but given it was a police pension plan you should take full advantage of the DROP. The attractiveness of the plan has only increased IMO. However, there is no way they've have had investment returns to pay out the 9%+ they were promising. I'd continue to monitor it as closely as possible, and make sure that trustee and officers of the plan are reputable folks.

I certainly don't begrudge cops, firemen and member of the military their generous pension plan, after all you did literal risk life and limb, but I don't see how we taxpayers can continue to afford them.
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Old 11-10-2008, 07:57 AM   #19
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How can you advise to take full advantage of the plan and the attractiveness of the plan have gotten even better if there is no way they have had the returns to pay out the 9%+ in interest? If they cant afford to pay , then the plan would seem to have gotten riskier.

I understand that people may be jealous that they dont have the benefits that I have, but thats a whole different subject. Ive been jealous of other peoples salaries for many years.

How can the public not continue to afford to pay for these pension plans? It doesnt cost the public anymore now than it did 20 years ago (accounting for inflation). City of Dallas taxes are lower than most major cities and lower than the suberbs around here.

Back to the DROP plan.....the pension fund has over $3.3B in assets and only about $300M in DROP accounts so they only account for about 9% of the total fund. The avg return of the pension fund over the last 10 years was a tad under 10%. Sure, the avg is going to go down when 2008 returns are figured in, but even if the fund lost 15% or so the avg will only drop to around 9-9.25%. The DROP interest will drop to 9.5%. How is that tiny deficit going to affect the strength of the pension fund? Im no actuarial, bit it seems to me that it would take 10-20 years of subpar pension fund returns before paying out 8% interest (when avg returns were well below 8%) on only 9% of the pension fund balance would cause a great strain. Even in that worse case scenario, the pension board would probably lower the minimum interest rate to 5-6% (guessing here) which would still beat a 4% SWR so I would still probably be better off leaving it there.
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Old 11-10-2008, 10:53 AM   #20
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Quote:
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I know the idea of a 4% SWR is to have confidence that you will never run out of money. What if my goal is to draw the maximum amount possible from my portfolio while trying to ensure that it lasts 10-11 years. The goal would be to maximize withdrawals and run out of money in 10-11 years.

Is there some type of formula I can use to do this? I know I could do something like build a 10 year CD ladder and just spend one rung every year, but I'd like as much growth as possible just like a standard retirement allocation.
I think the "formula" you are looking for is to simply invest the money in any mix of mutual funds you like, then withdraw 1/120th of the fund balance the first month, 1/119th the second, 1/118th the third, etc.

If your funds have a return of zero, you will get level dollar amounts. If the return is positive, you'll get increasing amounts. If negative, decreasing.

Of course your withdrawals will vary a lot from mont to month. But, since you have $1.5 million to spend over 10 years, I don't think you're going to starve if your investments go south. So I can see why you might say that you can "afford" to take the volatility risk if you like (i.e. I can see a reasoning to invest in stocks rather than CDs).

Maybe you'd prefer to assume that your investments will have some positive yield - like inflation plus 5%. This allows you to spend a little more early on. The math is a little more complicated. The factors I get for a 5% assumption are 1/95.15 in the first month, then 1/94.54, 1/93.92, ....
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