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Re: SWR of 6.21% for 26 years
Old 04-01-2004, 08:05 AM   #141
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Re: SWR of 6.21% for 26 years

TH,

You conceded, I think, that long term stock and
bond returns are predictable via the Gorden Equation. You used a 30 yr time frame as I recall.

Bogle, in his book "Bogle on Mutual Funds",
shows a chart on page 249 of all 10 year periods
from 1957 through 1992 of the forecast vs actual
returns for stocks and bonds. The correlation for
stocks between forecast and actual was 0.77 and
the correlation for bonds was 0.96. The std deviation
was 3% on a mean return of 11% for stocks and
was 1.5% on a mean return of 5% for bonds. These
data, as they say in the trade, are statistically
significant.

This underlying correlation is still present in shorter
time periods but becomes increasingly swamped out
by the "noise" of the dog going in all different directions.
Someone else pointed this out in an earlier post, but
the sage comment was lost in all the uproar.

You asked for a formula and data to demonstrate
correlation. I think Bogle responded to the challenge.

Cheers.

Charlie (aka Chuck-Lyn of the Lucile St. Gang)
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Re: SWR of 6.21% for 26 years
Old 04-01-2004, 08:59 AM   #142
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Re: SWR of 6.21% for 26 years

Gummy asked:
Quote:
I always found it curious that people who calculate a 30-year SWR based upon the worst 30 years (in the last 75 or 100 years) assume (I suppose?) that they're considering calendar years: Jan thru Dec.

Has anybuddy considered years starting in Feb or Mar or whatever?
Yes. You can see the results at the Retire Early Home Page site. This is for the Retire Early Safe Withdrawal Calculator, Version 1.61, dated November 7, 2002. You can select any month using this (latest) version.
http://www.retireearlyhomepage.com/re60.html

Have fun.

John R.
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Re: SWR of 6.21% for 26 years
Old 04-01-2004, 10:54 AM   #143
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Re: SWR of 6.21% for 26 years

JWR1945:

Neato!

(I'm surprised at the similarity of results!)
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Re: SWR of 6.21% for 26 years
Old 04-01-2004, 11:03 AM   #144
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Re: SWR of 6.21% for 26 years

Quote:
. . .Seriously, the term "true" may indicate too much confidence in any predictive number. It sounds as if it's becomming a religious belief, and pushing religious beliefs on others is much more difficult than offering new SWR tools and insights. . .
Yeah, I think BMJ has a good point. Some may not like the term safe withdrawal rate as applied to the number that comes out of a historical simulator, but the term "true safe withdrawal rate" applied to a number that comes from a more complex and (at least some think) questionable historical analysis is probably not a good thing. I think your use of the term "works under the worst case scenario" could also lead to more debates rather than fewer. The historically derived SWR, by definition, works under the worst case scenario from our history. So do you propose to somehow predict what the worst case scenario of the future is going to be?

I can tell you two possible worst case scenarios: 1) you die tomorrow => SWR is as much as you can spend today. 2) you work for wages till you die => SWR is equivalent to your take home pay. I'm not going to plan for either one of these.

Seriously, tell me what you think worst case scenario is, and I'll bet I can come up with a worse one.
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Re: SWR of 6.21% for 26 years
Old 04-01-2004, 11:26 AM   #145
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Re: SWR of 6.21% for 26 years

Quote:
Statistical Historical Investigation of Termination
Well, I think gummy's nailed it, so to speak. Case closed.

I like the sensible withdrawal rate followed by ignoring the whole thing after retirement method.

arrete - darn good thing there was nothing in my mouth when I read that.
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Re: SWR of 6.21% for 26 years
Old 04-01-2004, 11:56 AM   #146
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Re: SWR of 6.21% for 26 years

Whoops...that acronym already has been allocated...

In this thread, I'll repost here...
http://early-retirement.org/cgi-bin/...54731;start=11

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RE: SPECIAL HIGH INTENSITY TRAINING

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Re: SWR of 6.21% for 26 years
Old 04-01-2004, 12:00 PM   #147
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Re: SWR of 6.21% for 26 years

That having been said, we could use C.R.A.P.

Current Reasonable Abjuration of Peso's.
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Re: SWR of 6.21% for 26 years
Old 04-01-2004, 12:26 PM   #148
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Re: SWR of 6.21% for 26 years

Seriously, tell me what you think worst case scenario is, and I'll bet I can come up with a worse one.

The approach that I take with the data-based SWR concept is to include a caveat that the number works if the future is not worse than the past. By the phrase "if the future is not worse than the past," I mean to cover the possibility of economic calamities like hyperinflation or nuclear war or political instability, anything so bad that it could cause the U.S. stock market to perform worse than you would otherwise expect to see it perform given how it has performed in the past. I do not include within the caveat the possibility that we will see lower returns as the result of starting from higher valuation levels because that it is a result you would expect given that higher valuation levels have always caused lower long-term returns in the past.

I understand that there is no number that will work with 100 percent certainty. I am not sure that it is such a big deal not to cover the possibility of things like nuclear war, however. In the event of nuclear war or hyperinflation, all bets are probably off anyway. There simply is no way to effectively account for that sort of thing in your investment strategies. In contrast, it is possible to account for the likelihood that high valuation levels will continue to result in lower long-term returns. So I think that that factor should be included in SWR (but not HSWR) analysis.

The purpose of the terminology I was proposing was to clarify the essential difference between the two methodologies. The conventional methodology is not really aiming to determine the number that applies on a going-forward basis. What the conventional methodology does is report on what has happened historically, it sums up the historical data in one neat little bundle of a number. The data-based SWR concept, in contrast, uses a methodology that is forward-looking. That is why it requires inclusion of an adjustment for changes in valuation.

It was not my aim to paint the conventional methodology in a bad light. I was trying in the wording of my post not to do that. My expectation would be that the majority of the board community would continue to prefer the conventional methodology number (the HSWR) over the data-based methodology number (the SWR). I don't see this as a question of "good" or "bad," or "better" or "best" (although I obviously have my personal preference, as I presume most others do). I believe that the two methodologies serve different purposes, and that the discussions get tangled because people are often applying standards that only make sense for one of the two methodologies to the other.

The big problem we have had is that the debate has become so personalized. I say "the conventional methodology is analytically invalid," and people hear this as a criticism of people who have supported the conventional methodology. It is not intended as that. It is intended as the expression of a belief that the conventional methodology does not generate the number described in the definition used in the analysis. The more precise way to say things is to say "the conventional methodology is analytically invalid for purposes of determining SWRs." It does what it does just fine. It just doesn't tell you the SWR, as defined for purposes of the analytical process being employed.

Changing the terminology would be a shorthand way of putting people on notice of all this, of letting them know up-front the purposes of the analyses being performed. The HSWR should not be expected to do what the SWR does, and the SWR should not be expected to do what the HSWR does. They are two different concepts, and it would ease discussion if we referred to them by two different names.

You have said, SalaryGuru, that you are not sure whether Bernstein is right or wrong when he says that the conventional methodology number is "misleading" at times of high valuation. That response suggests to me that you might be a good candidate to favor the HSWR number in your planning. I feel confident that Bernstein is right on this point, so I am a good candidate to favor the SWR.

It is a matter of different strokes for different folks, not a matter of declaring some folks right and other folks wrong. I am not trying to take away the analytical tool that we have made use of in the past. I am trying to add a new analytical tool to our community toolbox.
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Re: SWR of 6.21% for 26 years
Old 04-01-2004, 12:54 PM   #149
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Re: SWR of 6.21% for 26 years

I dont think that over the medium to long term, a horrific event like a briefcase nuke going off in DC, a dirty bomb over manhattan or a multinational war in the middle east would really make a major difference. A short term significant drop, eventually made up in a few years.

Think about it: the primary driver of short to medium term returns is risk premium. I think the biggest medium long term danger is a continued slide of the risk premium and its attendant lower stock returns and interest rates. Some awful thing happening like this is simply going to pump up the risk premium. A hell of a cold way to think about it, but we're in the numbers here.

I think the REAL worst case scenario is a return to mean historic valuation, minus a little risk premium against time periods like the 30's or the 70's, giving us 1-2% "real" bond returns and 2-3% "real" stock returns, coupled with occasional hiccups in inflation that bring that "real" return to near zero. In other words, a 25-30% drop in our net portfolios followed by a weaker than historic SWR return rate over a 20+ year period.

Its double damning. On one hand because the investment value of a majority of our withdrawal period could be nullified, and because I would bet that 90-something percent of us would pull from the stock market or go back to work WELL before we watched our money do nothing for 20 years. Hell I'd be willing to bet that when I showed up for my walmart greeters job I'd be shift replacing Bogle. Nobody is mechanical enough to "go down with the ship" over that long a period of time.
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Re: SWR of 6.21% for 26 years
Old 04-01-2004, 05:22 PM   #150
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Re: SWR of 6.21% for 26 years

Quote:
. . . The approach that I take with the data-based SWR concept is to include a caveat that the number works if the future is not worse than the past.
*****, this statement makes me think that you do not understand what the current historical simulators do.

First, the current simulators are entirely data-based. Whereas what you describe is not.

Second, if the future is not worse than the past, then the FIRECALC SWR will work today.

You claim to have come up with a method that includes a stock valuation bias added to existing data-based analysis that is important. While qualitatively this argument is appealing, you have not 1) quantified the accuracy of your valuation metric and 2) established any causal proof that your analysis of that metric can improve the numbers that come from the conventional data-based method.

You need to do those things before you try to tell us that you have a great method. I'm not saying you are wrong to want to augment the existing historical simulations, simply that you have not done the work yet. That is why many people disregard your claims.

Quote:
I understand that there is no number that will work with 100 percent certainty. I am not sure that it is such a big deal not to cover the possibility of things like nuclear war, however. In the event of nuclear war or hyperinflation, all bets are probably off anyway. There simply is no way to effectively account for that sort of thing in your investment strategies. In contrast, it is possible to account for the likelihood that high valuation levels will continue to result in lower long-term returns. So I think that that factor should be included in SWR (but not HSWR) analysis..
Okay, so you throw out nuclear war. I don't think anyone will lose sleep over the absence of that in their safe withdrawal calculator. (They may lose sleep over the fear of nuclear war, but not their portfolio survival after the bomb). But how do you define hyperinflation? What's the inflation rate for how long before it is hyperinflation. How large a stock market decline for how many years is the "worst case". You throw that term around as if you are solving a problem that conventional historical data-based simulators will not solve. But what problem is that exactly? -- not philosophically . . . numerically!

Quote:
. . . The purpose of the terminology I was proposing was to clarify the essential difference between the two methodologies. The conventional methodology is not really aiming to determine the number that applies on a going-forward basis. What the conventional methodology does is report on what has happened historically, it sums up the historical data in one neat little bundle of a number. The data-based SWR concept, in contrast, uses a methodology that is forward-looking. That is why it requires inclusion of an adjustment for changes in valuation.
*****, your proposal is no more forward looking than the conventional methodology. Both look at history and assume that the future will be no worse than the past. You want to apply a current valuation metric and predict stock market returns based on that valuation as you look forward. The conventional method simply takes the data at face value.

Quote:
. . . I don't see this as a question of "good" or "bad," or "better" or "best" (although I obviously have my personal preference, as I presume most others do). I believe that the two methodologies serve different purposes, and that the discussions get tangled because people are often applying standards that only make sense for one of the two methodologies to the other.
Okay. Let's get to the point. You haven't produced a methodology. You've spoken of a philosophy. Give me a simulator that allows me to simulate my situation and derive a safe withdrawal rate and I'll use it. I will test it. I will discuss it's strengths and weaknesses. In the absence of a simulator, give me some numbers I can compare to values I get from FIRECALC.

Quote:
. . . It is a matter of different strokes for different folks, not a matter of declaring some folks right and other folks wrong. I am not trying to take away the analytical tool that we have made use of in the past. I am trying to add a new analytical tool to our community toolbox.
*****, it's a matter of not offering us a real choice. I can use a historical data-based simulator like FIRECALC or a monte carlo simulator to get me in the ballpark of my retirement needs, or I can talk philosophy with you. Give us another real choice and we will all try it. But be warned . . . once people start trying to use a new simulation approach, the work of supporting it and answering questions about it will really begin.
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Re: SWR of 6.21% for 26 years
Old 04-02-2004, 01:29 AM   #151
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Re: SWR of 6.21% for 26 years

I'm not saying you are wrong to want to augment the existing historical simulations, simply that you have not done the work yet.

The work is not complete, that's for sure. The way I see it is, we are in the third or fourth inning.
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Re: SWR of 6.21% for 26 years
Old 04-02-2004, 03:47 AM   #152
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Re: SWR of 6.21% for 26 years

***** wrote:

There is hardly anyone who ever talks to him when he posts over at the SWR Research Group board because the leaders of the community there have imposed a boycott of that board.

Just to clarify: I was boycotting the board when you were running it before you were banned from NFB. *I'm not boycotting it now but I don't post there because I don't think that his switching studies are particularly useful for determining a "safe" SWR. *I also prefer to post SWR subject material on the FIRE board which is appropriate for such subjects. *I can't speak for the other "leaders" of the board but I suspect that they have similar feelings.
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Re: SWR of 6.21% for 26 years
Old 04-02-2004, 03:49 AM   #153
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Re: SWR of 6.21% for 26 years

I find this SWR analysis a fascinating exercise, but I have a question (which, hopefully, somebuddy can answer):

How would one actually use the SWR number, once it's been calculated?

Do you imagine calculating each January and using the number to determine your withdrawals for the coming year?

I've spent an inordinate amount of time playing with SWR myself but still don't understand its use.

For example, in one tutorial

http://home.golden.net/~pjponzo/min-to-max.htm#SWR

my "sidekick" asks the above question ... and I'm unable to answer :-/
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Re: SWR of 6.21% for 26 years
Old 04-02-2004, 05:10 AM   #154
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Re: SWR of 6.21% for 26 years

Quote:
How would one actually use the SWR number, once it's been calculated?
Here are a couple of reason's I'm interested at age 34:
  • It helps me get an idea of how big my portfolio may need to be before retiring
  • Given the above, it helps me determine whether I may need to work 10 more years or 30 more years
  • If I retire early enough, I may be taking the 72(t) exemption from my IRA, and a SWR would increase my confidence in the survivability of the IRA geven a fixed Substantially Equal Periodic Payment. (I've heard that recent tax changes greatly reduce the penalty for drying up the IRA, but it's been a while since I looked.)
Projecting forward, I assume it will be very comforting to have a ballpark figure of how much I could withdraw from my portfolio every year and not run out during market fluctuations (even if I plan to adjust my withrdrawls based on performance).

That's what SWR means to me.
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Re: SWR of 6.21% for 26 years
Old 04-02-2004, 06:11 AM   #155
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Re: SWR of 6.21% for 26 years

How would one actually use the SWR number, once it's been calculated?

I've used it primarily for making allocation decisions. When I put my plan together in the mid-90s, my first step was to determine a take-out number because that told me how much I needed in the way of assets to hand in the resignation. I developed a conservative plan that called for a 3 percent withdrawal, a somewhat risky plan that called for a 5 percent withdrawal, and a medium plan that called for a 4 percent withdrawal. (I ended up pulling the trigger when I had enough in the way of assets to support the medium plan.)

After determining my three possible take-out numbers, I wanted to figure out what my asset allocation strategies should be to support plans with any of those numbers. Before I did my SWR work, I had most of my assets (which were not much at the time) in stocks. I determined that having so much in stocks was going to delay my retirement by a good bit, and I was anxious to get on with the next stage of my life, so I elected to move my money out of stocks to get my overall lifetime SWR number up (not because of any dislike for stocks, which I like just fine).

I revisit my plan once a year, and make adjustments. For example, I have long believed that I will be able to get a SWR of higher than 4 percent from stocks when stock prices return to lower valuation levels. I had a rough idea in my mind that 5 percent would probably be possible, but I had never done any formal statistical analysis to determine an exact number. I still don't think we know how high the SWR for stocks may someday go, but I feel confident after seeing the work that JWR1945 has done that 5 percent is certainly attainable and that 6 percent is likely attainable. Knowing that influences my other allocation decisions. I'm less worrried now if I have to go for a few years with an SWR of less than 4 percent on some sections of my portfolio because I feel confident that in the not-too-distant future I'll be able to tap into an SWR of greater than 4 percent for stocks.

I've never viewed my plan as a finished plan. I continue to study investing issues in retirement and I like to be able to take advantage of new stuff I learn. I would not like it if I felt that I were locked into decisions I made at age 43 because that was the plan I thought made sense then and I followed a rule that it just couldn't be changed. If I find that I can get a higher SWR than I thought was possible at an earlier time, I let my wife know that it seems OK for us to spend a little more on furniture or something like that.

For safety's sake, I follow a rule that our level of financial independence should either remain the same or increase a bit each year. I have been able to do that for the first four years of the plan because I am not invested in stocks and the asset classes I am in are more predictable. I don't think I could follow that rule religiously if I had a significant allocation in stocks. But in times when I am invested in stocks, I intend to do a "mark up" in the value of my stock investments at times when prices bring the nominal value of the stock portion of my portfolio well below the real value indicated by SWR analysis.
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Re: SWR of 6.21% for 26 years
Old 04-02-2004, 07:19 AM   #156
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Re: SWR of 6.21% for 26 years

Many thanks for your replies.

I can understand that you may use SWR to estimate eventual portfolio requirements and/or make adjustments to your portfolio contributions (before retirement) and/or adjust asset allocation (while you're making investments).

BUT, when you eventually DO retire (and start withdrawing) you will continue to calculate a SWR to determine withdrawals?
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Re: SWR of 6.21% for 26 yearswhen you eventually D
Old 04-02-2004, 08:15 AM   #157
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Re: SWR of 6.21% for 26 yearswhen you eventually D

When you eventually DO retire (and start withdrawing) you will continue to calculate a SWR to determine withdrawals?

Mine is a new-fangled sort of "retirement," Gummy.

My goal was to make a shift from a corporate writing job to a career writing non-fiction books on a freelance basis. My wife is a stay-at-home mom and we have two pre-school age kids. Freelance writing is not a career where you can count on a lot of money coming in (I assume a minimum of $10,000 per year on average). So I needed to know for sure that my assets would allow me a take-out number of x number of dollars per year before I could responsibly turn in a resignation notice. I did not retire from the world of work altogether. I retired from dependence on a corporate paycheck.

With this sort of retirement, my financial circumstances will be highly variable for a good number of years to come. It is possible that I will not find a publisher for my first book. If that happens, I am going to need to make adjustments, either cut back on spending or find an alternate means of bringing in at least $10,000 per year. It is also possible that I will make a whole bunch more than $10,000 per year from my writing efforts. If that happens, I can put everything above $10,000 into savings and get myself in a situation where I can spend more or spend the same and take a lower withdrawal rate.

My circumstances are such that I need to check how my plan is holding up on at least a yearly basis. I don't necessarily do a full-blown SWR analysis every year (truth be told, I don't have Excel on my computer and couldn't put together a spreadsheet if you put a gun to my head). If I learn that the SWR for X asset class has gone up a bit, I factor that in; and if I learn that the SWR for Y asset class has gone down a bit, I factor that in.

The key for me is that each time I revisit the plan, it look solid on a going-forward basis. I don't look for 100 percent certainty or anything like that. But I don't want to expose my family to significant financial risk just so that I can go off and chase dreams. I don't take the SWR stuff so seriously that I would take it out to three decimal points or anything like that.

But if you aren't going to use SWR analysis to assess investment risk, what are you going to use? It seems to me that, if you are making life plans that have ramifications many years into the future (whether you feel that these plans constitute a true "retirement" or not), you need some means of knowing whether you can count on your portfolio to provide the financial support needed on a long-term basis. SWR analysis is the best tool that I know of for developing a reasonably informed assessment.
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Re:  Gummy, maybe this is...
Old 04-02-2004, 08:21 AM   #158
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Re:  Gummy, maybe this is...

... what you have in mind.

http://www.analyzenow.com/dynamic_fi...anning_pro.htm
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Re: SWR of 6.21% for 26 years
Old 04-02-2004, 09:23 AM   #159
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Re: SWR of 6.21% for 26 years

gummy inquires:
Quote:
I can understand that you may use SWR to estimate eventual portfolio requirements and/or make adjustments to your portfolio contributions (before retirement) and/or adjust asset allocation (while you're making investments).

BUT, when you eventually DO retire (and start withdrawing) you will continue to calculate a SWR to determine withdrawals?
I am retired early (6 years ago at 50). I've used the Sensible WR as ballpark figure to aim at all along. My husband was comfortable with my using 5% (which is outside the range of the SWR studies), but I just figured about 4% was something worth aiming at. Not the only criterion for retiring, however. I was mainly fed up with working and could think of a whole slew of things to do instead.

I retired with a lot of "slosh" in my budget. Sort of like gummy's budgets which depend on how things are doing that year. For instance, last year I had 2 unexpected costs and one expected new cost. I was starting up a new "hobby" - bird rehabbing which required a lot of fixed costs up front. Then I had serious dental problems. Then one of the kids decided to buy a house and I pitched in. So I got really close to spending a little too much. But I have plenty of places I can cut costs out of my budget, hence the slosh.

I figure these things kind of even out over time. Some years I spend a lot less than I planned. I'm hoping this is one of those years : I still look at what percentage of my assets I'm spending, but it is just one of several checks I use. I also keep an eye on various parts of my budget over time, such as food, medical :P, vacation , and so on. It helps me catch unnecessary spending, but it also indicates area that I have to plan for increases in the future - such as vet bill for elderly cats - they are increasing over time.

I also try to think ahead about other costs that may crop up but I don't have now. Like increased trips to the parents as their health requires (if they'd just get off that dang island in Maine!). Also an increasing number of grandchildren increases the budget a bit - I think gummy can relate to that.

Anyhoo - yeah, I looked at SWR before I retired as a ballpark figure to aim at (but not to depend on) and I sort of watch the percentage of assets spent now that I'm retired. But I'm not fanatical about it. And I realize that the risks can't be quantified, so why the heck try?

Too much babble.

arrete
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Re: SWR of 6.21% for 26 years
Old 04-02-2004, 11:18 AM   #160
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Re: SWR of 6.21% for 26 years

*****:
Thanks for the explanation. I can see how an annual SWR calculation may be useful (for you).

Nords:
Hey! That URL describes a scheme much like my "sensible withdrawals" spreadsheet - which I call Dynamic Monte Carlo
Neato!

arrete:
"I also keep an eye on various parts of my budget over time, such as food, medical, vacation, and so on.
I have plenty of places I can cut costs"


Aah, great minds think alike, eh what?
I find this useful, from time to time:
http://home.golden.net/~pjponzo/retirement-expenses.htm

The missus tells me the numbers and I fill in the spreadsheet.
(As you might imagine, she looks after the budget and won't let me near our bank account.)
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