SWR Question

[Bob_Smith]

I'd be cutting back in a bad year too. Hell, I'm already cutting back, and this is a good year! I trust that the historical numbers are correct, but I also know that they don't entirely apply to me (my inflation rate is likely to be higher than the official rate), and I'm not at all certain we won't see worse in the future. I'm going through the Unclemick cheap phase. But life has never been better, nonetheless.

Also, I just can't quite accept the fact that I can loaf and still pay the bills. A part of me suspects that it's all a fantasy that will be ripped away somehow. I occasionally glance over my shoulder expecting a metaphorical truant officer to show up and say, "get your lazy ass back to work!"

[retire@40]

I have posted many times that I think people would be a fool to continue to spend their SWR that they calculated the day they retired after a bear market decline of 40%. No, I think you should rerun FIRECalc and get a different answer.

I think FIRECalc is an excellent tool, but I have asked Dory to include some extra features such as withdrawing less after a down year in the market and maybe withdrawing more an up year in the market.

With all of this said. I very much doubt that we will ever see a market downturn as bad as the depression.

I always viewed FIREcalc as a perpetual tool that should be run frequently, preferably every 6 months but at least once a year to get more relevant figures. I don't know how Dory could add extra features for up or down markets since that would only be a 50-50 guess at best and would yield no useful information. I also doubt that there will be a depression any time soon. There are plenty of mechanisms in place to prevent what happened in 1929.

I don't know how Dory could add extra features for up or down markets since that would only be a 50-50 guess at best and would yield no useful information.

Sure it would! If you decreased withdrawals by a percentage in down years and increased withdrawals after an up year, it would have te same effect as reBalancing your portfoilo. Imagine putting that extra money in another account that you could tap. It would increase your average SWR.

As far as 50-50 chance. FIRECalc 'knows' when we had up years and down years and could give you a range of SWR's - And as far as implementing it, it's after the fact not before it.

Gummy has a calculator on his website that addresses this very topic.

I agree with you that FIRECalc is a perpetual tool

[cute fuzzy bunny]

Also, I just can't quite accept the fact that I can loaf and still pay the bills. A part of me suspects that it's all a fantasy that will be ripped away somehow. I occasional glance over my shoulder expecting a metaphorical truant officer to show up and say, "get your lazy ass back to work!"

Funny, I felt the same way for at least a couple of years. Fully expected a phone call that said "Mr. H...theres been a little mistake...".

[73ss454]

Hello,
Been lurking for a while and enjoy all the posts. But I must say that Bob Smith's last post was funny as hell. As I consider ER I know that the guilt feeling will torture me. I actualy feel guilty just thinking about it. Hope I can over come this feeling, I plan on pulling the trigger the end of next year.
Regards,
JOE

[ESRBob]

Joe,
It gets easier with practice!
Anyone who is able to amass enough money to ER has also probably learned how to get their nose to the grindstone and make stuff happen. So we are really asking the leopard to change its spots.

The way I got over the guilt hump was to work up some internal mental justification that I really needed to stop working in order to have time to do all this other useful stuff that needed doing, and that there simply wouldn't be time to do all of it and work besides.

Lame, but in those first few years you'll use anything to get that truant officer off your back!

ESRBob

[unclemick]

I think we touched on this last year - I went a while "being unemployed". Then I was "a private investor". And then relief - in 1998 at 55, got a pension check and became "officially retired".

I use FIREcalc (and ORP) to periodically check if we're still in the ballpark. But basically key off income - pension, dividends, interest.

Actually spent more in the recent dip of 2000-2002 because we decide to do some remodeling.

Hmmm - Wasn't the old saw - 1929 got the rookies and 1937 nailed the pros. Still balanced index (mostly) - and 2000 -02 was a minor test.

[Jarhead*]

Also, I just can't quite accept the fact that I can loaf and still pay the bills. A part of me suspects that it's all a fantasy that will be ripped away somehow. I occasionally glance over my shoulder expecting a metaphorical truant officer to show up and say, "get your lazy ass back to work!"

Hey Bob: That mid-western work ethic is hard to shake, isn't it?

[hocus]

It got me out of the house, and showed my daughter that I had a place to go to every day.

My boy stayed at my wife's sister's house for a few days when my wife and he were visiting. When he got home, my boy asked me: "Dad, did you know that Uncle Mike gets dressed up and leaves the house early each morning? Why does he do that?"

[Bob_Smith]

Jarhead, great story!

My daughter is now 32, and on a recent visit with her, I asked her how she felt about me retiring so early. She stared at me as if she didn't understand the question.
"I was trying to get through my teen years, and didn't think about it one way or the other".

Yes funny. I also have a Daughter that is 31. I think teenage girls especially - It's all about them. I think if I would have had her around the house when I retired, I would have been busier than when I was working. Just taking her to events, to the mall, to her friends house. etc. etc.

At that age she would acost me as soon as I walked in the door from fighting rush hour traffic for an hour to beg for a ride exactly in the direction I just drove home from.

Jarhead,

Actually another thought just occured to me. At age 15 anything over age 35 is ancient. Retirement at 50 was probably not considered early for her at the time.

[Hyperborea]

Really...actually I find that very interesting. *So even though the history numbers say 4% is just fine and you can ignore the ups and downs, you'd still cut back in a down market?

So what that says is you dont really trust that the historic SWR isnt trustworthy?

I too don't plan on being extremely rigid with adherence to the "4% rule".

Let's look at retirement planning from an engineering perspective. *The SWR studies by intercst, Bengen, etc. give us the bounds of historical safety. *If you were going to implement a system to use that an engineer might build in safety factors to account for rare occurences that weren't sampled in the studies. *Examples of this are to multiply estimated loads for bridges by some factor (i.e. multiply the estimated carrying load of the bridge by 2 or 10 or something - I'm not a CivE so don't quote me). *This is the approach that some try with retirement. *They multiply the historical SWR by a "safety" factor - e.g. 1/2. *The problem with this solution is that we have finite resources and this "safety" factor makes the project possible for only maybe 5-10% of the already small percentage that can hope to retire early.

The other engineering solution is to build a system that dynamically adjusts to changing conditions. *Examples of this in the engineering world are traffic light systems or some of the anti-sway systems for skyscrapers that use a feedback loop to control weights that counteract wind and other forces. *In an early retirement plan this is a dynamically adjusted withdrawal rate. *You want to set this with certain properties. *You want it set so that most of the time that you will likely have a desirable standard of living and at the worst expected (worse than historical calculated by the SWR) it will still provide enough to survive on. *We can dampen the variability with buffers and such but at the root of it we adjust the withdrawal rate. *Whether we do this algorithmically (my plan) or "by the seat of the pants" is another discussion.

[ESRBob]

Hyper,
Thanks for the engineering explanation for something that this serial entrepreneur understood viscerally: no matter what your models or predictions tell you, nothing is certain, so keep some powder dry. You may have no choice but to run things up to the edge, from time to time, but if you do that constantly, bad things are more likely to happen.

ESRBob

Really...actually I find that very interesting. So even though the history numbers say 4% is just fine and you can ignore the ups and downs, you'd still cut back in a down market?

So what that says is you dont really trust that the historic SWR isnt trustworthy?

Another Comment.

I really do trust that the historic SWR is trustworthy. I'm just not trustworthy of the future SWR.

[cute fuzzy bunny]

Dont take it the wrong way, I was just trying to decypher some of the thinking. It sort of doesnt grok.

- Historic data on index funds is good, so buy index funds
- Historic data on overall returns is good, but may be a little lower in the future, but overall its good, so expect something just shy of that historic number
- Historic data on safe return rates is good for rough planning
- But if theres a rough patch, cut back in assumption that the future might be different.

We collectively go through a dichotomy of saying the future wont be worse than the past, then couple that with a stated expectation of acting like it *will* be.

I'm not saying index funds are inherently bad, or that I have any serious expectations as to what returns will be what, and I'll definitely act differently in bad years vs good ones. It just seems like we frequently make decisions with the past data as an indicator, then say we'll behave differently than past data says we should.

Maybe I'm just too stubborn in trying to force things into blacks and whites.

My well calculated SWR method? All dividends and capital gains that the funds generate goes directly to my checking account. If that runs low and we arent close to the end of the quarter, take a little more out of something thats run up and send it over. If things get bad, spend a little less. If things are good, spend a little more.

:P

I'm not saying index funds are inherently bad, or that I have any serious expectations as to what returns will be what, and I'll definitely act differently in bad years vs good ones. *It just seems like we frequently make decisions with the past data as an indicator, then say we'll behave differently than past data says we should.

Past data is all we have to go on, so we make decisions based on that. Those that don't learn from history are bound to repeat it. If behaving differently is spending less money, I can not see how that would disrupt a retirement plan. Selling your stocks on the way down in a bear market would!

I can concoct a scenario where we are all screwed no matter what. So you do the best we can. I don't know if my SWR is 4% or 1.9%, but if my investments start failing me I will make do with a lower number if I have to.

But like you, if things go good spend a little more, if things go bad spend a little less.

I just have no desire to do anything different than index funds. If it doesn't work then so be it. Depending on my own investment saavy would be even more risky as I see it.

[Hyperborea]

Dont take it the wrong way, I was just trying to decypher some of the thinking. *It sort of doesnt grok.
<snip>
We collectively go through a dichotomy of saying the future wont be worse than the past, then couple that with a stated expectation of acting like it *will* be.

Let's look at it in the engineering analogy again. *Any real engineers please forgive me as I'm just a physicist/mathemetician/computer scientist - at least based on the degrees that I have.

If I was building a bridge then I would have certain requirements that I would want the bridge to fulfill. *One of these would be carrying capacity or in other words how much traffic it can carry per day. *To allow it to meet this requirement I would have to design it with a certain number of lanes and efficient on and off ramps. *I would also need to figure out what the max load that traffic would generate and ensure that the design could support that. *Whether the bridge can support this weight depends on the actual design (portfolio allocation) and the materials used (individual asset classes).

Another requirement is that this bridge would have is can it survive under adverse conditions. *What are these adverse conditions? *Is it all the adverse weather conditions that have been observed in the area? *That might only be 130 years of weather observations and some of the early decades might only have spotty data. *That would be much better than going with just normal traffic conditions on a sunny day. *What about dealing with the 1000 year storms (i.e. the one you will get once ever 1000 years)?

As I understand it a lot of engineering design for these things has just used over-designing for loads double or 10 times that of the normal traffic. *This can often work for bridge building but the cost and complexity of the bridge is greatly increased. *In the case of a retirement plan the numbers that can retire with double what "normal traffic" would allow is a small fraction of those who would normally be able to. *At safety factors of 10 the number that can FIRE is infinitesimal. *This doubling of the safety factor (halving the SWR) is the argument of some.

If instead of just statically doubling/halving one could perhaps instead use some sort of feedback design that would adjust the strength of the bridge in the right place at the right time then that would be much better. *Unfortunately here the analogy breaks down but an adjustable withdrawal is to account for those events outside the observed data (the 1000 year storm).

Maybe I'm just too stubborn in trying to force things into blacks and whites.

The thing is that small adjustments made early can save a potentially failing portfolio. *The question is how to distinguish one that will fail from one that won't in advance of the event happening. *It doesn't seem to be possible but the the adjustment needed is so slight that it wouldn't greatly affect lifestyle so why not make it?

My well calculated SWR method? *All dividends and capital gains that the funds generate goes directly to my checking account. *If that runs low and we arent close to the end of the quarter, take a little more out of something thats run up and send it over. *If things get bad, spend a little less. *If things are good, spend a little more.

A variable withdrawal system run by the seat of the pants. *I think it depends on how well calibrated one's pants are. *If you delay in making the adjustment in spending downward you will likely be hit harder than if you acted sooner with a smaller magnitude.

[Nords]

Hey, Hyper, that iterative algorithmic SWR is described in "J.K. Lasser's Your Winning Retirement Plan" and at Bud Hebeler's "Analyze Now!" website.

http://www.analyzenow.com/

He's a retired Boeing engineer/financier. Of course Boeing is about the only thing he's actually "retired" from, but his system takes all the uncertainty out of predicting the future...

Just because we're pessimistic & paranoid doesn't mean that some bozo isn't out to get us. We can blissfully put all our trust in SWR calculators (especially the really complicated ones with cool graphics, right?) but we still have to consider the "gotcha"s that SWR calculators can't model very effectively. For example, those with pension income have a very realistic basis for concern over their former company's solvency. All of us should fear a return to 1970s inflation rates ("But, but, this time it's REALLY different!!!") and we certainly fear healthcare inflation.

Oddly enough, the calculator that gives me the most comfort is Bernstein's "Retirement Calculator from Hell" series.

[Nords]

"I was trying to get through my teen years, and didn't think about it one way or the other".Damn! ;D
Regards, Jarhead

We have one of those in our home too. It doesn't matter what we do when the kid goes to school each morning-- as far as she's concerned we go into suspended animation when she leaves and we re-animate the microsecond she enters the door.

Hopefully our kid's work ethic is based on the realization that if she has one (especially coupled with a savings ethic!) then she can retire early like us ('cause she's sure not getting an inheritance). We figure that, like most of us today, the epiphany won't kick in until she's in her 30s.