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Re: SWR Question - Yearly Rebalancing Is Good?
Old 02-26-2006, 09:48 AM   #21
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Re: SWR Question - Yearly Rebalancing Is Good?

Originally Posted by TromboneAl
Here's a simpler way of looking at things.* You've discussed two SWR strategies.*

1. Taking 4% out the first year and adjusting for inflation for future years.

2. Taking 4% out every year.

These will give significantly different results.* FireCALC lets you estimate what the result of strategy #1 is.* If you want to use stragegy 2, you'll have to find a different app to estimate the results.

Just a note. You can use FIRECalc to evaluate strategy 2 also. Simply enter your initial withdrawal rate as $0 per year and increase your expense ratio by 4% (to 4.18% if you normally use the default of .18%).

Of course the answer you get will be 100% survival. Becuase no matter how small your portfolio gets, there will always be 4% available. In order to get any value from the simulation you have to look at the detailed results and see what 4% of the portfolio value really is.

A better way to look at this is to assume that some level of spending is required for survival and use this as an iniitial withdrawal rate. Then increase the expense ratio till the simulation fails. The total of the inflation adjusted survival level of withdrawal plus the percentage of portfolio value over your actual expense ratio is what you can spend from year to year.

I posted some results from this kind of simulation on the board somewhere, if anyone is interested in doing the search.

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Re: SWR Question - Yearly Rebalancing Is Good?
Old 02-26-2006, 10:06 AM   #22
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Re: SWR Question - Yearly Rebalancing Is Good?

Originally Posted by bbuzzard
My point is, they are the same. Look at is this way. Image two twins (obviously the same age). Twin #1 retires Jan 1, 2006 with assets of $1M. Based on FireCalc, she chooses a SWR of 4% and withdraws $40,000 on the first day of the year for living expenses. In 2006, inflation is 3%, and investment returns are 18%. Therefore, Twin #1 has $1,132,800 on January 1, 2007. She adjust her withdraw for 3% inflation and takes out $41,200 for living expenses in 2007.

Twin #2, retires on January 1, 2007, exactly one year after her sister. She happens to have exactly $1,132,800 on this date, the same as Twin #1. Based on FireCalc, she also chooses a SWR of 4%, taking $45,312 our of her account for 2007.

Riddle me this, Batman: What is the difference between the two twins? Why is $45,312 safe for one, but only $41,200 is safe for the other? What is the difference? My point is, readjusting you withdraw rate upward each year to 4% of you current assets does not effect the probability of portfolio success predicted by FireCalc relative to you original success rate.

You are right bbuzzard. To the extent that we believe one answer, we should believe it for both. There are really two issues here that we tend to get wrapped around becuase we confuse them:

1) do we believe FIRECalc so completely and believe we know our lifespan exactly so that we will make our plans to run out of money the year we die? Or do we figure that there is some probability that we live a very long time or that we face financial times worse than we have seen in the past 120 years?

2) if we understand and believe FIRECalc has some validity and value, can't we reapply it in future years after we have retired and assume the results have the same validity?

The answer to the first question is, "Maybe planning a cushion makes sense."

...and the answer to the second question is, "Yes." Look at the detailed FIRECalc results. Dory actually plots them on the opening page for a $1M portfolio with high probability of success. Some of those sequences ended up with over $6M (remember those are inflation adjusted dollars, too). Clearly, retirees who are fortunate enough to end up on one of those trajectories can afford to spend more. If after a few years of retirement you find yourself with a SWR much higher than your actual spending, you can decide what to do with it. You can use it to buy safety and a further cushion (see point 1). Or you can spend some of it. FIRECalc results are as accurate at that point in time as they are today. That statement does not imply that they will actually predict the future for either case.


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Re: SWR Question - Yearly Rebalancing Is Good?
Old 02-26-2006, 11:57 PM   #23
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Re: SWR Question - Yearly Rebalancing Is Good?

The numbers do indeed show that 4% of initial withdrawls produces the same 100% historical survivability as 4% of yearly balance.

But the subtle thing to realize is that the guy who took out 4% of initial will have a bigger nest egg at the end (and most points between) than the guy who took 4% of yearly balance. It makes sense... if you withdraw less you keep more.

If at any point in the future things get worse than history, the one with the bigger nest egg is in the better position. The one with a just-big-enough-for-historical nest egg is in trouble.
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Re: SWR Question - Yearly Rebalancing Is Good?
Old 02-27-2006, 09:48 AM   #24
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Re: SWR Question - Yearly Rebalancing Is Good?

If we hit something worse than the great depression, nest eggs will be the least of our problems.

Further, as I like to point out, we all have better financial 'sneakers' than 90+% of the rest of the people in the world, and therefore are fare more likely to be able to outrun that 90% while we're all running from the bear.

A mass financial catastrophy like that wouldnt faze me a bit. My home is paid for. I can shovel dirt to make enough money to feed my family. And excepting complete destruction of our country and economy, I'll still be relatively wealthy compared to my neighbors. Heck, I'd probably be a major buyer of real estate and equities at pennies on the dollar.

If it all goes so to hell that seven figures doesnt "survive", eight figures probably wouldnt be any different.
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Re: SWR Question - Yearly Rebalancing Is Good?
Old 02-27-2006, 11:08 AM   #25
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Re: SWR Question - Yearly Rebalancing Is Good?


The 4% SWR method only produces a bigger nest egg if markets are rising compared to the 4% annual take.

In either case an ER is unlikely to let his stash rise so large that he doesn't increase his withdrawals. Similarly in hard time an ER is unlikely to keep taking out large withdrawals to the detriment of his stash just cause the formula says he can.

That's why I liked the gummy-suff analysis. It gave some mathematical rigor to the likely behavior of real-world retirees. In great markets you'll probably spend some extra. In poor market you'll cut back.

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