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Old 08-26-2014, 12:09 PM   #61
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Originally Posted by daylatedollarshort View Post
A yield greater than 0 real increases these SWR higher, per the TIPS links previously posted. With a zero real yield, you'd just divide your beginning portfolio / years of retirement = SWR.

$100 beginning portfolio / 50 years = you can take out $2 a year.

100/50 =2.
1,000,000 / 50 = 20,000.

For a couple, annually this could mean:

$20K SWR ($1M portfolio, 0 real return, 50 year horizon) + $24K SS + $14K rental income = $58K retirement spending.

At age 90 annuities are pretty cheap or maybe the hypothetical couple in the above example has a $500K house for a reverse mortgage, to avoid depleting the portfolio to zero.

Instead of firecalc, you can just use a spreadsheet with inflation and real return as parameters to model your retirement planning under this methodology.
What does any of this have to do with my statement that you quoted?

Suppose I purchased at auction $1 million of 30-year TIPS at 0% real yield. Since the yield is 0%, there would be no coupons to cash each year. I would basically own $1 million of zero-coupon inflation-adjusted bonds which mature in 30 years. So how do I get my $33,333 each year? By selling 3.33% of my TIPS each year. Putting aside the logistical problems of doing this each year (paying commissions, bid-ask spreads, etc), the value of the TIPS I am selling will depend on the real interest rate at the time I sell. If real rates are above 0% when I sell, I will receive less than the inflation-adjusted 100 per bond, and I will have to sell more than 3.33% of my TIPS to get $33,333. Since these are zero coupon TIPS, the duration WRT real rates is very large - about 30 the first year. This means that if real rates rise 1%, the TIPS that I paid 100 for will only be worth about 70 when I go to sell, so instead of selling 3.33% of my position, I will have to sell 3.33%/0.7 = 4.75% of my position. As you can imagine, with real rates rising you will very likely deplete your portfolio in less than 30 years, unless you lower your SWR. This is hardly a riskless strategy, perhaps as risky as holding 100% equities. A rise of 1% in real rates the first year causes my portfolio to lose 30% of its value.
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Old 08-26-2014, 12:12 PM   #62
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To answer the OP question, my SWR for a 50 year old would be:

3.5%: Absolute maximum. Definitely worried I will run out of money.
3%: Good, but not great. Still a little worried.
2.5%: Great. Now I feel good. Reasonably confident I won't run out of money.
2%: Golden. No worries at all.
That's just way too conservative, judging by every retirement planner I've seen. Your SWR doesn't go down just because you're younger and FireCALC bears that out. Once you hit an SWR that gets you to 30 years at 90%+ you're basically golden from what I've seen, and that's not even including the benefit you get when FRA SS kicks in.

Having said that I plan on 3% initially but I'm not going to worry about it, and FireCALC says I can draw another $20k a year at 100% factoring in SS.
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Old 08-26-2014, 12:15 PM   #63
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Taxes must be added to this equation. This is not trivial because the ratio of the real rate divided by the nominal rate must be equal to or greater than the marginal tax rate for the life of the portfolio. Once that ratio fails the portfolio withdrawal permanently loses purchasing power.
Many of us include taxes as a line item in retirement spending........
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Old 08-26-2014, 12:16 PM   #64
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A TIPS only strategy at 0% real yield is about as dumb as 100% stocks.

You have no idea if TIPS could even be adjusted enough for inflation in a high inflation rate environment. 15% inflation, they might decide to use some other methodology to be able to afford the TIPS payment.

If we get a 50% or more drop in the market that is sustained for more than a year or two, I am not 100% sure TIPS will be as safe as they are made out to be.
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Old 08-26-2014, 12:26 PM   #65
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A household with a $3M portfolio experiencing a 30% drop the first year of retirement loses $1M in absolute dollars they may never be able to recover. They give up the chance for growth in return for not having to worry about losing the $1M. At $2M they need a 50% return to get back to where they started.
I have no heart burn with your choice, just not mine.

A side point to your example
30% drop of $1M in a $3M 100/0 portfolio
30% drop of $500K in a $3M 50/50 portfolio <-----

Link to S&P 10 year rolling returns, down cycles do happen, lot of positive years too.
http://allfinancialmatters.com/wp-co...s_with-CPI.pdf
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Old 08-26-2014, 12:28 PM   #66
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Originally Posted by jkern View Post
To answer the OP question, my SWR for a 50 year old would be:

3.5%: Absolute maximum. Definitely worried I will run out of money.
3%: Good, but not great. Still a little worried.
2.5%: Great. Now I feel good. Reasonably confident I won't run out of money.
2%: Golden. No worries at all.
That's just about my view too. 50 years-old here with an ~ 60/35/5 allocation.
My WR is 2.4% of my starting portfolio value and after 3 years of withdrawals, is now 2.04% of the current portfolio value. The dollar amount of my withdrawals is the same - I have not yet given myself an inflation-adjusted raise.
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Old 08-26-2014, 12:36 PM   #67
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If that's the case (and I see references to it in an earlier thread), the OP is leaving out A LOT of critical information. If advice is given without considering this information, it could be worthless, or even dangerous. He left off the OP mentioning 60/40, but I'm not sure if that is his AA, or he was starting another thought for comparison - that sentence sort of trails off?

I just ran FIRECalc for a 40 year period, 100% corporate bonds, and a 100% success only allows a 1.69% WR! And OP is talking about 3-3.5%? !!!!

Me thinks inflation and the investment profile is being ignored. Proceed with caution!

<< ignores inflation!!!!

-ERD50

Sorry it took so long to answer everyone. Did not mean to leave you hanging. I decided after much thought not to pursue a 100% bond portfolio. Decided to go 60/40 ish with managed payout from vanguard. All but 15% of this total is in taxable accounts.

Hope that helps you help me
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Old 08-26-2014, 01:09 PM   #68
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What does any of this have to do with my statement that you quoted?

Suppose I purchased at auction $1 million of 30-year TIPS at 0% real yield. Since the yield is 0%, there would be no coupons to cash each year. I would basically own $1 million of zero-coupon inflation-adjusted bonds which mature in 30 years. So how do I get my $33,333 each year? By selling 3.33% of my TIPS each year. Putting aside the logistical problems of doing this each year (paying commissions, bid-ask spreads, etc), the value of the TIPS I am selling will depend on the real interest rate at the time I sell. If real rates are above 0% when I sell, I will receive less than the inflation-adjusted 100 per bond, and I will have to sell more than 3.33% of my TIPS to get $33,333. Since these are zero coupon TIPS, the duration WRT real rates is very large - about 30 the first year. This means that if real rates rise 1%, the TIPS that I paid 100 for will only be worth about 70 when I go to sell, so instead of selling 3.33% of my position, I will have to sell 3.33%/0.7 = 4.75% of my position. As you can imagine, with real rates rising you will very likely deplete your portfolio in less than 30 years, unless you lower your SWR. This is hardly a riskless strategy, perhaps as risky as holding 100% equities. A rise of 1% in real rates the first year causes my portfolio to lose 30% of its value.
You can't purchase all your TIPS in one year with the same maturity date for this to work if you want to withdraw more than the interest each year. If you cash out your TIPS before maturity, you aren't guaranteed to get your principal back plus inflation.

The main financial guru advocates of liability matching are not recommending 100% TIPS, and when they do mention TIPS it is usually a ladder. The basics of the LMP are here:

Matching strategy - Bogleheads

Bodie recommends inflation adjusted asset classes including TIPS, I bonds, SS and inflation adjusted annuities for your safe asset floor. You can invest the rest in stocks under this methodology. He is just suggesting you not invest in stocks the money you absolutely cannot afford to lose.

The key concept is what are the safe withdrawal rates with a real return of 0 - 2%, which is the historical return of safe assets, which may include TIPS. Prior to the Fed lowering of interest rates 30 years TIPS were yielding inflation + ~2%.
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Old 08-26-2014, 01:23 PM   #69
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My earlier comment holds true for TIPs and other fixed income, even in tax deferred accounts, because taxes are not eliminated, just deferred. The marginal tax rate needs to be less than the ratio of real to total interest rate or the portfolio loses value.
Per youbet's post, I include taxes as an expense in our budget. For the hypothetical couple they would have to come out of the $58K.

If the $1M is in a 401K, the withdrawal would all be treated as income, wouldn't it?
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Old 08-26-2014, 02:08 PM   #70
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Sorry it took so long to answer everyone. Did not mean to leave you hanging. I decided after much thought not to pursue a 100% bond portfolio. Decided to go 60/40 ish with managed payout from vanguard. All but 15% of this total is in taxable accounts.

Hope that helps you help me
60/40 seems much more sensible than 100% bonds.
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Old 08-26-2014, 02:29 PM   #71
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100% of anything is a much riskier bet IMO, doesn't matter what it is. What we're seeing here is a classic overreaction to the events of 2008-09.
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Old 08-26-2014, 02:49 PM   #72
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What we're seeing here is a classic overreaction to the events of 2008-09.
And the next crisis will always be a bit different.

Kinda like the military adage about fighting the last war.
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Old 08-27-2014, 01:40 PM   #73
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I am planning to retire around October 2015. I was planning to withdraw 3 to 3.5% of my stash per year. I know what recent studies have suggested (going lower) but its getting a bit on the ridiculous side from my perspective. I was thinking that 2.2M divided by 35 years is 62857 per year. I currently can live on less and at a rate of return of 0% is a 2.857% swr. What would you do here? Thanks. If we assume a 2% rate of return annually (which I feel is very conservative with a 60/40 portfolio.
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I went through the same logic. A couple people have pointed it out, but yeah the achilles heel to this comforting assessment that at this point you could simply spend $62,857per year is inflation. True, but after even 20 years of 3% inflation that would let you live like you were spending $25,896/year today. I don't get the sense that's your goal

At the end of the day, I bet inflation is as much the reason why a good chunk of the people here decide they need to deal with the volatility and stress of equities and higher yield bonds as any other factor.
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Old 08-27-2014, 01:43 PM   #74
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A household with a $3M portfolio experiencing a 30% drop the first year of retirement loses $1M in absolute dollars they may never be able to recover. They give up the chance for growth in return for not having to worry about losing the $1M. At $2M they need a 50% return to get back to where they started.

Some households might not want to risk the $1M drop in return for a chance to earn more. Earning $3M more is not as important as hanging on to the first $3M. In economic terms it is referred to as the law of diminishing marginal utility.

Or a household that can live off pension income may have $250K and not want to lose $75K early on in retirement.
Looking historically though, there does seem to be some basis for believing in reversion to the mean within 5 years or so IF you are highly diversified. A 100% return in a relatively short period following a 50% drop is not such an unrealistic expectation. As my dad used to tell me, the stock market is like a kid on an escalator with a yoyo.
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Old 08-27-2014, 02:34 PM   #75
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......At the end of the day, I bet inflation is as much the reason why a good chunk of the people here decide they need to deal with the volatility and stress of equities and higher yield bonds as any other factor.
Spot on. That and if one avoids equities then you need a lot more money to retire all else being equal.
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Old 08-27-2014, 02:51 PM   #76
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Looking historically though, there does seem to be some basis for believing in reversion to the mean within 5 years or so IF you are highly diversified. A 100% return in a relatively short period following a 50% drop is not such an unrealistic expectation. As my dad used to tell me, the stock market is like a kid on an escalator with a yoyo.
Stocks are a good bet but it is still a bet, so it comes down to personal risk tolerance with a pretty bumpy ride along the way. For retirees with enough already in safe assets, they may no longer see a reason to keep playing the game. BB seems to have found that out with his clients post 2008.
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Old 08-28-2014, 09:40 AM   #77
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BB seems to have found that out with his rich clients post 2008.
FTFY.
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Old 08-28-2014, 10:15 AM   #78
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FTFY.
You can be rich, or you can have low spending, or other retirement income streams than your portfolio or some combination for this to work. But yeah with lower assets or retirement income you need to take on more risk.

That is why BB called it time to stop playing when you've already "won the game". No one is saying this approach will work for people who are 30 and want to retire on $1M. Many current retirees actually do live off mainly SS and pensions:

http://www.reuters.com/article/2014/...0EL1UH20140610

It works for people with low risk tolerance who are able to live off safe assets and are looking for less volatility than the 3 fund approach. I am just trying to point out the 3 fund approach is not the only game in town. People who want to avoid big losses more than look for portfolio growth might find this information useful. I know I did and I wish I'd heard about it sooner in our investing life. YMMV.
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Old 08-28-2014, 10:58 AM   #79
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Many current retirees actually do live off mainly SS and pensions:

Surprise: Even wealthy retirees live on Social Security and pensions | Reuters
Very true. Vegetable gardens, bartering, yard sales and sometimes even hunting game are ways these people make do on their SS check. It also helps to live in a lower cost of living area where that SS check goes a lot farther.
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Old 08-28-2014, 11:04 AM   #80
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...

That is why BB called it time to stop playing when you've already "won the game". ....
Seems to me this whole discussion is moot. If you define "won the game" as being able to live off something like TIPs for 40 years at 0-1% real, then basically you are talking about a WR of ~ 1/40, or ~ 2.5%.

If I plug 40 years and 2.5% of $1M ($25,000), and fairly 'conservative' 50/50 AA, the lowest ending balance in the worst period in history reports an ending balance of $892K.

If I plug in the same with 0/100 AA, and a fixed 0% inflation and 1% fixed return, the ending point is $198K.

And if I use higher equity AAs, the minimum ending point is even higher (greater than $1M, which FIRECalc does not report correctly - it shows the starting balance if ending is greater than starting, but you can eye-ball it on the graph). And you won't be 'selling equities when the market is down', divs and interest will provide much of that 2.5%, and you will be re-balancing into equities, or just drawing from the fixed to re-balance.

IOW, if you have "won the game" and can live off a relatively low WR%, you can do pretty much anything you want and you won't run out of money. With inflation tracking investment (assuming you can get them in the future, or enough of them), your money will mathematically outlast you. With equities, if your money doesn't outlast you, we probably will have larger problems that affect everyone.

-ERD50
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