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SWR is just common sense!
Old 04-13-2013, 10:00 PM   #1
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SWR is just common sense!

The more I read about retirement planning, the more it just seems like common sense......I've been doing the “guaranteed floor / upside potential” thing all my working life. Since when is it a novel idea?

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An alternative approach to retirement income planning that is gaining traction is the “guaranteed floor / upside potential” approach. With this approach, you first build a floor of very low-risk guaranteed income sources to serve your basic spending needs in retirement. The guaranteed income floor is built with Social Security and any other defined-benefit pensions, and through the use of your financial assets to do things such as building a ladder of TIPS or purchasing single-premium immediate annuities (SPIAs). GLWBs could also play a role here. Not all of these income sources are inflation adjusted, and you do need to make sure your floor is sufficiently protected from inflation, but this is the basic idea.
Also why is everyone so amazed when a planner suggests modifying a withdrawal rate according to portfolio performance....that' s also just common sense. Anyone going into ER without a stable foundation of income or a plan to comfortably reduce spending in the advent of a market melt down is asking for trouble.
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Old 04-13-2013, 10:52 PM   #2
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It may be common sense, but look around, it seems to be in short supply these days.
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Old 04-13-2013, 11:09 PM   #3
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Originally Posted by nun View Post
Anyone going into ER without a stable foundation of income or a plan to comfortably reduce spending in the advent of a market melt down is asking for trouble.
Well then, I'm doomed, doomed I tell you! No pension, no annuity, already spending as little as possible. OTOH........ WR ~2.75% and building equity in rental properties to generate a future income stream might help keep the wolf from the door.
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Old 04-13-2013, 11:18 PM   #4
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Originally Posted by nun View Post
... or a plan to comfortably reduce spending in the advent of a market melt down is asking for trouble.
This is often stated as if it is obvious, but I don't recall anyone ever describing their plan in hard, objective numbers.

How much of downturn would trigger a reduction in spending?

What is your reference point? Is it your starting portfolio, inflation adjusted starting portfolio, a recent peak, last year, last month, something else ?

How long would the downturn need to last before making an adjustment?
How much of an adjustment?

Would the adjustment continue in downward steps if the market continued to go down? What if it went down and stayed at that level for several years? One adjustment, or continued downward adjustments?

FWIW, a FIRECALC run provides historical success rates for an inflation adjusted WR that just keeps on that track through good and bad times. Cutting back spending in bad times would add some cushion, but it's hard to predict how much. And it's hard to even guestimate w/o some understanding of the parameters that one would use to determine their cutbacks.

We've seen some recent pullbacks that recovered pretty quickly. Someone might call off some special travel plan or something due to a drop, and then see the market return, and maybe not be able to arrange that trip again. There may be more to lose than there is to gain.

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Old 04-13-2013, 11:52 PM   #5
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This is often stated as if it is obvious, but I don't recall anyone ever describing their plan in hard, objective numbers.

How much of downturn would trigger a reduction in spending?
For me I would look at the inflation adjusted value of my portfolio at each withdrawal and adjust the income accordingly, but only in the case when the portfolio didn't grow enough to sustain my initial WR of 2%

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What is your reference point? Is it your starting portfolio, inflation adjusted starting portfolio, a recent peak, last year, last month, something else ?
Inflation adjusted portfolio value is my reference

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How long would the downturn need to last before making an adjustment?
How much of an adjustment?
I'd do it when I took income out and the adjustment would depend on the size of the downturn.

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Would the adjustment continue in downward steps if the market continued to go down? What if it went down and stayed at that level for several years? One adjustment, or continued downward adjustments?
It would continue downwards, remember I have a foundation of income from rent and an SPIA in ER and then also from pensions and SS post 66 when I won't need to make any withdrawals from my portfolio.

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FWIW, a FIRECALC run provides historical success rates for an inflation adjusted WR that just keeps on that track through good and bad times. Cutting back spending in bad times would add some cushion, but it's hard to predict how much. And it's hard to even guestimate w/o some understanding of the parameters that one would use to determine their cutbacks.

We've seen some recent pullbacks that recovered pretty quickly. Someone might call off some special travel plan or something due to a drop, and then see the market return, and maybe not be able to arrange that trip again. There may be more to lose than there is to gain.

-ERD50
FIRECALC is fine as is the 4% rule and the work of the gurus as long as people realize that they are only guides to some average scenarios for an average person. They aren't good for my particular situation (or anyone's) because I don't know if I'm average and the use of historical data to predict the future is something I'm not really prepared to rely on when it comes to my retirement income.

As far as spending goes I could certainly reduce my planned spending by a third if I needed by getting rid of the car, cable TV and economizing on food. Cutting spending is a very personal thing, but people should think about it.
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Old 04-14-2013, 06:00 AM   #6
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No doubt a lot of this is common sense and a fluid process requiring lots of adjustments as we go along. I think though ERD50 though raises a topic that doesn't receive enough attention. It is too easy to "delay life" and possibly miss experiences being overly cautious. ER and a lot of life in general is often a leap of faith and lots of times one just has to decide to go for it.
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Old 04-14-2013, 07:32 AM   #7
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I'm doing this with rental properties. My 9 properties spit out enough cash flow that I could live off of if I went to a low expense model.

My DW has plans for a more elaborate retirement so we'll be working for a few more years (51/50 now).
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Old 04-14-2013, 08:07 AM   #8
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I have seen folks describe how they plan to adjust in fairly specific terms before. I will probably use
  • % of remaining portfolio (in the early years),
  • inflation adjusted withdrawals (later),
  • Soc Sec floor income,
  • adjusting spending (gradually, not radically each year according to portfolio value, and I know how each expense category could be adjusted, or not)
  • a SPIA as a plan B option, probably much later like age mid 70's
  • and reverse mortgage, radical spending reductions, etc. as plan C
No one wants to "die broke" more than I do, but I also know it really can't be done with my plan.

As for 'delaying life and possibly missing experiences being overly cautious' - that implies ones plan has exceeded expectations to the upside. I wouldn't consider that missing anything really...if charities get a small windfall when we go poof, I can live with that. YMMV
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Old 04-14-2013, 08:37 AM   #9
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May I ask you why you are not using annuities such as an SPIA ? By the way I tried to send you a PM a couple of days ago but it did not go through, not sure what happened with messaging here.
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Well then, I'm doomed, doomed I tell you! No pension, no annuity, already spending as little as possible. OTOH........ WR ~2.75% and building equity in rental properties to generate a future income stream might help keep the wolf from the door.
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Old 04-14-2013, 08:50 AM   #10
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May I ask you why you are not using annuities such as an SPIA ? By the way I tried to send a PM a couple of days ago but it did not go through, sorry.
Please understand that my post was satirical! I feel confident that my low WR and future rental income, as well as recently-acquired LTC insurance, provides effective risk management. As for annuities, I have researched the subject and I have no fundamental objection to SPIAs. I believe an annuity or three may be appropriate for me much later on, perhaps in my 70s, and at a time when interest rates are significantly higher than they are now. At this time, I do not believe annuities are a good deal for me and I would not be prepared to permanently lose access to any portion of my assets.
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Old 04-14-2013, 08:59 AM   #11
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I apologize for missing the sarcasm. It is very nice to know we broadly have similar approaches. I also plan for SPIAs after 70.
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I believe an annuity or three may be appropriate for me much later on, perhaps in my 70s, and at a time when interest rates are significantly higher than they are now. At this time, I do not believe annuities are a good deal for me and I would not be prepared to permanently lose access to any portion of my assets.
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Old 04-14-2013, 09:00 AM   #12
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Originally Posted by Midpack View Post
I have seen folks describe how they plan to adjust in fairly specific terms before. I will probably use
  • % of remaining portfolio (in the early years),
  • inflation adjusted withdrawals (later),
  • Soc Sec floor income,
  • adjusting spending (gradually, not radically each year according to portfolio value, and I know how each expense category could be adjusted, or not)
  • a SPIA as a plan B option, probably much later like age mid 70's
  • and reverse mortgage, radical spending reductions, etc. as plan C
No one wants to "die broke" more than I do, but I also know it really can't be done with my plan.
This looks like a sensible approach. I think we have to move beyond the AA and 4% SWR dogma. What gets me is when the financial gurus abandon one dogma and come up with another, like suddenly saying SPIAs can work better for you than a bond allocation. How come they didn't see that before, or that having a "financial floor" is a good idea.......Dooohhh, that's pretty basic financial planning IMHO.

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As for 'delaying life and possibly missing experiences being overly cautious' - that implies ones plan has exceeded expectations to the upside. I wouldn't consider that missing anything really...if charities get a small windfall when we go poof, I can live with that. YMMV
I'd also say that "delaying life and possibly missing experiences being overly cautious' assumes that money is a requirement to live a full life... spending less money does not necessarily mean that you experience less or live life less fully. An ER forum is necessarily focused on money, but if we make it the center of our lives that will lead to us "missing experiences".
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Old 04-14-2013, 09:07 AM   #13
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I apologize for missing the sarcasm. It is very nice to know we broadly have similar approaches. I also plan for SPIAs after 70.
Actually I do not think our approaches are similar, obgyn. I am not planning for SPIAs; I am going to reevaluate them at a more opportune time, whereas you have already committed to deferred annuities. My asset allocation to equities is significantly higher than yours. I have investment real estate, which I believe you do not. I have a small allocation to venture capital, and I'm sure you don't. I have no pension, but I believe you do. IOW, not similar at all.
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Old 04-14-2013, 10:33 AM   #14
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couldn't agree more

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I'd also say that "delaying life and possibly missing experiences being overly cautious' assumes that money is a requirement to live a full life... spending less money does not necessarily mean that you experience less or live life less fully. An ER forum is necessarily focused on money, but if we make it the center of our lives that will lead to us "missing experiences".
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Old 04-14-2013, 02:07 PM   #15
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For me I would look at the inflation adjusted value of my portfolio at each withdrawal and adjust the income accordingly, but only in the case when the portfolio didn't grow enough to sustain my initial WR of 2%.
OK, but I guess I'm confused about 'not sustaining a 2% WR'? I understand that FIRECALC cannot be held up as 'gospel' since we cannot know the future, but I don't think any scenario fails at anywhere near a 2% WR, that is a lot of cushion against future unknowns (and good for you in getting to such a secure position).

I suppose if your portfolio dropped by 50% (inflation adjusted), that would put your initial 2% WR at a 4% WR, so at that point you might say the failure % is unacceptable to you? I guess I could see that. But that would probably have meant retiring right at a peak in the market, which is what makes for marginal success rates, but if you are at 100%, it still means success even as a WR goes up during a downturn - there was a subsequent recovery. I guess you don't want to 'count' on that historical recovery - understandable.

To be honest, I haven't really set down specific guidelines for what I would do if the portfolio got to a scary level. My approach has been to plan on a reasonably conservative WR (low to mid 3% range overall), and DW is currently still working a part-year job, so that has softened the WR for now. Despite the roller-coaster market, my NW is up considerably from when I retired. I made no adjustments during the recent downturns.

At a low 3% WR, the historical success rate is some comfort. I figure that the chance of hitting a significantly worse than Great Depression or Great Inflation period are slim enough that I will cross that bridge when I come to it.

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I'd also say that "delaying life and possibly missing experiences being overly cautious' assumes that money is a requirement to live a full life... spending less money does not necessarily mean that you experience less or live life less fully.
Yes and no, IMO. Sure, if hard times fall, I will make adjustments and do what I can to live a full life. No sense just sitting there and being grumpy. We will find ways to do more with less and enjoy it as well as we can.

But as I said earlier, if you really wanted to take a once-in-a-lifetime trip, and skipped it due to what might turn out to being overly-cautious, that's it - there is no going back. Sure, you'll get over it, you'll mange to find ways to be happy. But that trip (or whatever) might have meant a lot to you, and it might be a real shame to deprive yourself.

-ERD50
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