Smart guys question 4% SWR strategy

[dbr]

The general message of the article is that the standard diversified stock/bond asset allocation with approximately 4% (inf. adjusted) withdrawal or other withdrawal scheme of similar nature is an inefficient way to invest while in retirement. The cost is that in order to avoid retirement ruin, one will be forced to a higher asset balance (or lower income) than might otherwise be achieved The back side of the ineffiency coin is the large number of successful retirement outcomes that leave the retiree with a large estate at death when the money could have been spend during a lifetime.

The methods that are more efficient are to invest in stable risk free income streams such as single premium immediate annuities (inflation adjusted) and TIPS at 2% real return, among possible suggestions

[youbet]

Originally Posted by rogersteciak

I subscribe to the "three buckets" approach to retirement financing

Let's not go there...... Discussed to death already. Many of us have AA's similar to what you describe and handle withdrawals and rebalancing also similarly. But, many just don't use the "buckets" jargon to accomplish essentially the same thing.

[REWahoo]

Originally Posted by youbet

Let's not go there...... Discussed to death already.

Why not take a look at this: (FAQ Archive) Ray Lucia and his buckets

[haha]

Originally Posted by dbr

The methods that are more efficient are to invest in stable risk free income streams such as single premium immediate annuities (inflation adjusted) and TIPS at 2% real return, among possible suggestions

I think he makes this point well, given his assumptions. But 2% real return 1 year TIPS continually rolled over?

Pure fantasy. TIPS like every other security are volatile as to price and in this case, more importantly yield.

Current available TIPS yields are

5 year 0.52%
10 year 1.40
20 year 1.94
30 year 1.91

I would imagine that inflation indexed annuity quotes must reflect these same low yields, if one were to buy them now.

Ha

[unclemick]

Two things:

1. Wm sharpe is well er sharp - and still helping crank them out out at
Stanford Business School - the last place in the world you want to make anything sound simple.

2. A wise ass(not me of course) might point out that the 'policy portfolio' aka the infamous 60/40 used by defined pension plans through a stretch of history had a yield competitive with 4% - aka 'da magic number' coughed up by massaging spreadsheets/historical data and other fun with math stuff.

And another thing - The Norwegian widow would like to point out for the conservative types - 4.20% for Wellesley(a 40/60) on the VG website.
That knowledge and a rousing game of pinochle will get you through the current rain storm in Kansas City. Stanford Business School is another matter.

In short - the 4% SWR is sort of the 'holy grail' (no Monty Python jokes) that gets benchmarked for 'improvements'. Something like 'those guys' who beat the pants off the S&P500Index with their new improved whatevers.

Sharpe is always a fun read - even when I don't understand him.

heh heh heh - Who me??

[clifp]

Originally Posted by ERD50

I didn't read the whole thing, just the excerpts provided above, but I interpret this to mean....

that at the end of 30 years of a 'guranteed' 4.46% SWR, you are also 'guaranteed' to have zero dollars left.

Is that correct? That is how I interpret 'never has a surplus'. If you assume a fixed % return (I don't know how he predicts future returns, or does he just buy 30 year bonds?), you can simply self-annuitize that over 30 years. Is that what the article is saying?

Fine approach - at the same time I can call and have my gravestone carved at today's wages with the year '2038' on it.

edit/add:

OK, I can go plug that into a SS, but 4.46% sounds right if you self-annuitize and assume a 2% real return.

-ERD50

Ah I am glad somebody else caught that. Yes the zero risk portfolio (which contains non-existent 2% TIP short-term bonds) is guaranteed to have zero dollars after 30 years. Clearly the world of financial planning would be vastly simpler if we all agree to check out 30 years after retiring.

I think I am going to start a retirement financial firm called Logan's Run, which will offer 5%+ withdrawals, with a small catch. (Hopefully Chris Wallace will have left Dateline in the next 30 years, before my client discover the catch!).

An interesting article. It is hard argue with his premise that if you'd be happy to see Dylan in concert, it is crazy to take so much risk that you have decent chance of only seeing it on Pay for View.

Still I think by focusing on a fixed length of time, he is really missing the boat on making this applicable to real retirees.

[Notmuchlonger]

ALRIGHT clifp! Logan's Run reference!

[cute fuzzy bunny]

Yep, I love the plans that try to leave you with a reliable zero portfolio at the end. Nice plan, but you do have to die on schedule.

Also regularly interested in the plans where people cant stomach the idea of leaving money behind in their estate, so they elect to give it to an insurance company in return for reliable but sub-par returns.

Still no free lunches in sight.

[dbr]

Originally Posted by clifp

Ah I am glad somebody else caught that. Yes the zero risk portfolio (which contains non-existent 2% TIP short-term bonds) is guaranteed to have zero dollars after 30 years. Clearly the world of financial planning would be vastly simpler if we all agree to check out 30 years after retiring.

I think I am going to start a retirement financial firm called Logan's Run, which will offer 5%+ withdrawals, with a small catch. (Hopefully Chris Wallace will have left Dateline in the next 30 years, before my client discover the catch!).

An interesting article. It is hard argue with his premise that if you'd be happy to see Dylan in concert, it is crazy to take so much risk that you have decent chance of only seeing it on Pay for View.

Still I think by focusing on a fixed length of time, he is really missing the boat on making this applicable to real retirees.

To the extent that the retirement is annuitized having no wealth is not the same as having no income. The perspective of the paper is that dying with wealth means you used your money inefficiently. The trick, as one says, is how to die without money but also make sure you don't live without income. It is fascinating that in an age where the demise of the defined benefit pension, especially the gold plated COLA's ones including Social Security, is universally lamented, that the idea of ending up in the same situation where we have income but no wealth is considered a fate worse than death.

[haha]

Originally Posted by dbr

It is fascinating that in an age where the demise of the defined benefit pension, especially the gold plated COLA's ones including Social Security, is universally lamented, that the idea of ending up in the same situation where we have income but no wealth is considered a fate worse than death.

Like Uncle Mick says, it's all hormones. On a pension, you are a pensioner.

With assets you are Daddy Cool.

Ha

[Hamlet]

I think there is a basic problem with this article's premise. They are assuming that any "surplus" has no value to the retiree.

I think a lot of people put some value on leaving some money to their children or favorite charities. So that surplus has at least some value to some people.

[RunningBum]

Originally Posted by Hamlet

I think there is a basic problem with this article's premise. They are assuming that any "surplus" has no value to the retiree.

I think a lot of people put some value on leaving some money to their children or favorite charities. So that surplus has at least some value to some people.

It also has value if you live longer than expected.

[yakers]

Originally Posted by haha

And TIPS ladders? Isn't harping on TIPS ladders what got Rob Bennet subjected to nasty personal attacks and ultimately banned?

For the first year that I posted on here I wrote long pieces explaining why I thought that the 4% rule underestimated risk, given volatile portfolios.

Ha[/color]

No, TIPS ladders and other questions about the 4% rate is not what got rob/HoCu$ tossed off many, many web boards. It was being a disruptive troll. You probably know that. Plenty of ways to engage with the 4% issue, a diehards poster bob90245 has a lot about the subject Retire at the Pie Shop
Now if someone had loaded up on ibonds when they were first issued,they would be in as good a position as a COLAd pension.

[teejayevans]

Originally Posted by rogersteciak

I subscribe to the "three buckets" approach to retirement financing:

1. Bucket #1 (cash) -- Enough cash to pay the next year or two of living expenses. This lets you sleep well at night.
2. Bucket #2 (income) -- Dependable income sources such as pensions, social security, and high-quality bonds and dividend-paying stocks. You own these assets for the dependable income they provide so that it helps to restore the cash you need in bucket #1.
3. Bucket #3 (appreciation) -- A diversified portfolio of stocks and other investments that are expected to appreciate over the long term, but may be highly volatile over the short term of a few years. The 4% safe withdrawal rate applies to this bucket, so when there are a few lean years, the other two buckets pick up the slack.

When you do withdraw from bucket #3 (volatile appreciation assets), add the amounts to bucket #1 (cash) to restore its balance to a year or two of living expenses; otherwise, use the money to buy more assets in bucket #2 (dependable income assets).

Ditto, because with their model, 60/40 split they are taking money out
in down market, because you some money in cash, you don't have to do
that. Your bucket 1 only has 2 years worth, that wouldn't be enough
back in the 2000-2002 bear market. I would want at least 5 years worth.
TJ

[ESRBob]

I like the 'Modified 4% Rule' -- take 4% of your portfolio value every year and live on that. That way you'll be making annual adjustments -- both up and down. Almost like saying "Every Year is Year 1". If you operate that way, you're guaranteed to never run out of money (As some wags have noted, 4% of your last dollar still leaves you with 96 cents...)

Seriously, the data on this method suggest that compared to the original 4% Rule, you'll take out as much or more withdrawals over the long run, with a far higher portfolio survival record -- survival being defined as keeping up the real value of the portfolio over time, which also means your inflation-adjusted level of income stays up, and you'll still have your money. The only hard part is during down years when you need to tighten your belt. But since everyone else will be also, it might not feel so hard.

[haha]

Originally Posted by yakers

No, TIPS ladders and other questions about the 4% rate is not what got rob/HoCu$ tossed off many, many web boards. It was being a disruptive troll. You probably know that. Plenty of ways to engage with the 4% issue, a diehards poster bob90245 has a lot about the subject Retire at the Pie Shop
Now if someone had loaded up on ibonds when they were first issued,they would be in as good a position as a COLAd pension.

Well, I've been around here long time, and it appears to me that a so-called troll is often just someone who keeps bringing up topics that are dismissed by the majority, or by the majority of the vocal.

I appreciate your link to threads on this topic of funding invariable demands with variable return instruments. I am not familiar with other boards, except those devoted to individual stocks or industries. One board is likely enough for me.

I have seen posters told "You have nice life now" for nothing more offensive than holding a different idea, and not shutting up about their different idea when chastised by their betters.

Since we really don't know what will turn out to be right or wrong, I think I often would rather hear what these mavericks have to say, even if they can be annoying in the way that they say it.

Anyway, I referred to this Bennet situation in response to Doc's post about Sharpe's paper. As some noted, I was attempting a little exaggeration as humor. I guess it didn't work, or at least didn't work for you.

I did read the paper, pointed out the outdated yield assumptions, and others pointed out the 30 year horizon. In the context of the paper that is actually not a very big deal, as they were using a 65 year old as the example. Not nothing, but maybe not of overwhelming importance.

Something of perhaps greater meaning is that in a world of real interest rates between 0.5 and 1.5%, it takes a lot of faith to expect historic returns in the equity markets. But hey, everyone chooses his own uncertainties, the ones he is aware of and the ones he isn't. As the man said, "You pays your money and you takes your chances."

Nevertheless, it remains true that a very similar idea was presented, years ago, by Rob Bennet, and regardless of why he may have been banned, it would have been a quite respectable way to invest since then.

I read above that he has had financial difficulty. If Rob got into trouble financially it was because he foolishly thought he was a writer, and because he quit work quite young, severely undercapitalized, and as I remember with children. ER is not tolerant of stupidity.

You may be aware of a strong trend toward retirement conservatism on this board of late. Partly I think because there are more well-capitalized people posting. But it wasn't always so. A sometimes easy way to get on the wrong side of the Politburo was to point out to hopeful but marginal retirees that what they needed was not some sort of technical magic, but the awareness that they were severely undercapitalized.

Some people seem to have LBYM magic, but most, especially parents of young children should probably not rely on experiencing those magic results themselves.

Ha

[REWahoo]

Ha, as old Ronnie was fond of saying, "Well, there you go again..."

[haha]

Originally Posted by REWahoo

Ha, as old Ronnie was fond of saying, "Well, there you go again..."

LOL!

[Martha]

Man, I love you guys.

[walkinwood]

I did some simple calculations using the PMT function- yes, at a 2% real return, in 30 years, you'd be left with nothing at the 4.46% withdrawal. That would equate to worst case for the 4% SWR using Bengen's calculations.

But, this is an ER forum so you need to take more than 30 years into account. I calculated for 40 years - 3.655%, for 50 years - 3.182%. And then there are the practical issues as others have pointed out.

Through his example, I understand his points that the 4% SWR method causes you to leave money on the table (he refers to it as paying a surplus), can be replicated for less (how?), and if the preferences of the retiree are known, can probably be done for even less (again how?).

But he lost me after that. What do we do about it? Also his example of a single 30 year period left me cold - that's our most important and least controllable variable - our lifespan!

Are there some mathematicians here who could simplify his math for us?