SWR Question

[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!

 

[Cut-Throat]

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.

 

[Cut-Throat]

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

 

[Cut-Throat]

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.

 

[Cut-Throat]

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]

SWR for non-engineers

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!
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.

 

[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.

Nords: Sounds like you have a handle on it.
My wife and I have talked about the mistakes we made while raising our kids. (We came to the same conlusion each time. We worried too much.) It's hard to not have high expectations with your teen-agers when you were so perfect yourself.
Also convenient to forget when you were 17 and joined the Marine Corps., with the background sound a standing ovation from parents, and the local sheriff

Good surfing Nords

 

[Hyperborea]

Re: SWR for non-engineers

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.

Thanks for the link.  I've only had a chance to skim it right now but I'll give it a more detailed look later.

but his system takes all the uncertainty out of predicting the future...

Hmmm, an algorithmic/feed-back SWR system isn't meant to predict the future but just to react to changing conditions now.  I suppose you could look at it as prediction but only in the sense similar to noticing that it's overcast outside and that means a good chance of rain so you should bring an umbrella today.

we still have to consider the "gotcha"s that SWR calculators can't model very effectively.

Absolutely right.  One place to do this is in your asset allocation.  Another is in how or where you choose to retire to.  There are a lot of other choices that can affect survival in ER.

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.

Oh definitely.  My already retired dad (before the boomers) is probably going to be ok with his pension but my brother-in-law (Gen-X) may very well have problems with his.

With the current administration's plans of massive spending and decreased taxes leading to almost unheard of deficits and mounting debt I think that a return to 70's double digit inflation is almost a given.  That and a US dollar that is becoming next to worthless suggest putting a good percentage of one's assets outside of the US.

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

Yup, his number of 3-4% is probably going to be fine for most.  I still think that the feed-back approach will allow one to take more if you are doing well and less if not so well without involving any "pants".

 

[JWR1945]

Now that I am fully retired (as of 9/30/04) I have been thinking about portfolio withdrawals. Can someone answer the following questions for me?

If I have already determined that a 4% SWR will meet my spending needs with a 95% probability of success, and my portfolio returns more than 4% plus inflation in the first year of retirement, can I safely withdraw all of the portfolio gain for the year?

There is a severe penalty for proceeding as you have indicated.

I have collected some relevant data using my modified version of the Retire Early Safe Withdrawal Calculator, version 1.61, November 7, 2002. The Retire Early Safe Withdrawal Calculator uses algorithms that are similar to those in FIRECALC, but they are not identical.

With my modified version, I withdrew a percentage of the gains whenever there were gains in portfolio balances. I did not withdraw a percentage of portfolio balance changes when there were losses from one year to the next. In all cases I withdrew a fixed withdrawal rate (plus inflation) in terms of the portfolio's initial balance.

Data for amounts withdrawn have been averaged over the previous five years to smooth out the choppiness of withdrawals. Some years withdrawals are big. Some years they are small. When the portfolio balance decreases, only the baseline withdrawal applies.

Tapping into Portfolio Gains dated Sat Oct 23, 2004.
http://www.nofeeboards.com/boards/viewtopic.php?t=3021
Tapping into Portfolio Gains: Portfolio Balances dated Sun Oct 24, 2004.
http://www.nofeeboards.com/boards/viewtopic.php?t=3023
Tapping into Portfolio Gains: Amounts Withdrawn dated Sat Oct 23, 2004.
http://www.nofeeboards.com/boards/viewtopic.php?t=3022

Have fun.

John R.

 

[indymom]

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.


It makes me remember that when I was in High School, I wondered why the radio stations kept on broadcasting, since there was no one to listen. :

 

[indymom]

[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.]


It makes me remember that when I was in High School, I wondered why the radio stations kept on broadcasting, since there was no one to listen. :

 

[Bruce]

Hyperborea on small correction on one of your previous post. A 1000 year storm do not occur every 1000 years - they have a .1% chance of occuring every year - you can have 2 1000 year storms in the same year

 

[wzd]

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.

My wife has a great story along these lines. When she was 12 and at a picnic with her parents and their friends, she made a big deal of how old 30 was. How life was just about over when you got that OLD. Well, on her 30th birthday, she got about a dozen cards from those people consoling her on her life being just about over!

 

[John Galt]

Hello Bruce! Your comments about a "1000 year storm"
got me thinking about our situation. We live in a
"100 year flood plain". Only the thing is, this area flooded in 1996, 2000, 2002. Supposedly this improves our odds going forward. We still keep a lot of the stuff in our garage up off the floor though. The worst part is what to do with 4 dogs when the house is surrounded by water

John Galt

 

[Cut-Throat]

We live in a
"100 year flood plain". Only the thing is, this area flooded in 1996, 2000, 2002.

I guess this explains all of the exceptional deals in real estate in your area.

 

[John Galt]

Hi Cut-Throat! Being serious for a change, I have owned
property in this particular flood plain continuously since
1974. So, it's not a problem for me. It's a real pretty
area and I am used to it (the occasional high water).
Although, it can be a turn off for potential buyers, this is offset
by our location (90 miles from Chicago). To anyone used
to big city prices, all of this beauty, waterfront
property and cheap prices look mighty appealing.
It's a good deal for everyone.

John Galt