The 4 Percent Rule: Static Decisions In A Dynamic World

[Midpack]

While the 4% SWR methodology is one good basis for setting an FI portfolio $ goal, it was not meant to be blindly deployed as an actual withdrawal approach - I don't know anyone who plans to. There have been countless articles restating (most lower) what a safe initial % WR might be were anyone to actually blindly follow inflation adjusted constant spending withdrawals. All of them end with a high probability of a huge residual, if past history is any indication - not everyone wants that outcome.

This article uses the 4% SWR withdrawal methodology (aka inflation adjusted constant spending) as a benchmark for comparison with 3 dynamic (remaining portfolio) withdrawal schemes and provides Probability of Failure, Cost of Surplus & Risk-Adjusted PV of Withdrawals for each.

Interesting but not a lot of detail, something for me to play around with...

The 4 Percent Rule: Static Decisions In A Dynamic World

FWIW

[audreyh1]

I think my brain is already fried today. I might try to read this one again tomorrow to understand it.

But in the meantime:

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Despite all this talk of dynamic withdrawals, some level of stability for withdrawals is necessary for budgeting purposes.

Point out to the retiree the wisdom of "income smoothing" - variable income is not the end of the world.

[mickeyd]

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This article uses the 4% SWR withdrawal methodology

4% SWR is the basis for most (all?) financial web sites. Easy to understand. Easy to get confused about.

If those guys from Trinity U only knew what they were getting into they should have copyrighted the deal and asked for one cent per post as a royalty. Would have made a sweet annuity.

[walkinwood]

Thanks for posting. It is an interesting read, but without the details, a bit difficult to process.

I liked the rules that Guyton proposed - mainly because they are clear and detailed.

Guyton's rules do not use life expectancy or any metric based on remaining years. Instead, he tried to get the highest withdrawal rate for a specified retirement period. I'd be interested in a detailed analysis that uses life expectancy (either actuarial or self-defined)

[Midpack]

Quote:

Originally Posted by walkinwood Thanks for posting. It is an interesting read, but without the details, a bit difficult to process. I liked the rules that Guyton proposed - mainly because they are clear and detailed. Guyton's rules do not use life expectancy or any metric based on remaining years. Instead, he tried to get the highest withdrawal rate for a specified retirement period. I'd be interested in a detailed analysis that uses life expectancy (either actuarial or self-defined)

Hmmm... I guess I need to read up on Guyton's decision rules again, last time I did it seemed most here were having a hard time understanding his methodology. Can you describe the rules in simple terms?

[Midpack]

Since the OP isn't of great interest, probably best that I add this here vs starting another thread.

Here's another article on dynamic % portfolio remaining withdrawals, this one (importantly IMO) attempts to factor in mortality on an ongoing basis. FWIW...

Quote:

Five different withdrawal strategies were reviewed for the analysis: 1. Constant Dollar Amount: Based on Initial Balance (“Constant Dollar”) Withdrawal Amount: a fixed amount, increased annually by inflation, based on the initial balance at retirement 2. Constant Percentage: (“Endowment Approach”) Withdrawal Amount: fixed percentage of portfolio value 3. Changing Percentage Probability of Failure Fixed Retirement Period (“Constant Failure Percentage”) Withdrawal Amount: based on maintaining a constant probability of failure over the expected fixed retirement period 4. Changing Percentage: 1/Life Expectancy Withdrawal Approach (“RMD Method”) Period Determination: updating based on survivorship experience Withdrawal Amount: 1 divided by the remaining retirement duration (life expectancy) 5. Changing Percentage: Probability of Failure Mortality Updating (“Mortality Updating Failure Percentage”) Period Determination: updating based on survivorship experience Withdrawal Amount: based on maintaining a constant probability of failure over the estimated remaining retirement duration

http://corporate.morningstar.com/ib/...Portfolios.pdf

[pb4uski]

I think excessive surplus is a concern with any approach analytically, but not as a practical matter. If my surplus starts building up above a certain point, it seems likely that I will ratchet up my spending (more travel, dining, fly first class, etc) and enjoy the prosperity. Conversely, if my investment results are not so good, I will ratchet down my spending to avoid running out of money and being a burden to my kids.

So while surplus may be an academic "problem" I don't see it as being a problem realistically unless one was wedded to 4% withdrawals and had no discretion in your living expenses, which I think is rare.

[audreyh1]

Quote:

Originally Posted by pb4uski I think excessive surplus is a concern with any approach analytically, but not as a practical matter. If my surplus starts building up above a certain point, it seems likely that I will ratchet up my spending (more travel, dining, fly first class, etc) and enjoy the prosperity. Conversely, if my investment results are not so good, I will ratchet down my spending to avoid running out of money and being a burden to my kids. So while surplus may be an academic "problem" I don't see it as being a problem realistically unless one was wedded to 4% withdrawals and had no discretion in your living expenses, which I think is rare.

Well, I think that's just it - if you "notice" surplus, what kinds of annual adjustments are reasonable to make? Is someone going to just increase their withdrawal rate willy-nilly?

So I think having a methodology that addresses both running out of money and leaving "too much" surplus (unless you really want to leave it to heirs) makes sense.

[Midpack]

Quote:

Originally Posted by pb4uski I think excessive surplus is a concern with any approach analytically, but not as a practical matter. If my surplus starts building up above a certain point, it seems likely that I will ratchet up my spending (more travel, dining, fly first class, etc) and enjoy the prosperity. Conversely, if my investment results are not so good, I will ratchet down my spending to avoid running out of money and being a burden to my kids. So while surplus may be an academic "problem" I don't see it as being a problem realistically unless one was wedded to 4% withdrawals and had no discretion in your living expenses, which I think is rare. Quote: Originally Posted by audreyh1 Well, I think that's just it - if you "notice" surplus, what kinds of annual adjustments are reasonable to make? Is someone going to just increase their withdrawal rate willy-nilly? So I think having a methodology that addresses both running out of money and leaving "too much" surplus (unless you really want to leave it to heirs) makes sense.

+1 in blue. While I'm going to be conservative with 40 years ahead of me (like pb4uski), with no heirs I'd like to avoid the extreme surplus paths too.

That's why I am exploring withdrawal approaches, an interesting mental exercise anyway...thanks.

[pb4uski]

Quote:

Originally Posted by audreyh1 Well, I think that's just it - if you "notice" surplus, what kinds of annual adjustments are reasonable to make? Is someone going to just increase their withdrawal rate willy-nilly? So I think having a methodology that addresses both running out of money and leaving "too much" surplus (unless you really want to leave it to heirs) makes sense.

Yes, willy-nilly - a subjective ongoing reassessment of how much I can spend and not run out of money. I might be right, I might be wrong, but nothing in life is guaranteed.

One way I think of it is that anything in excess of 0% failure under Firecalc could be spent if I chose to.

As a practical matter, I would be less inclined to spend any excess early and more inclined to spend it later - but that is just my being naturally conservative and wanting to be highly confident that we'll never be a burden to DD and DS.

However, if you find a magic potion - please feel free to share.

[Tyro]

Quote:

Originally Posted by Midpack While the 4% SWR methodology is one good basis for setting an FI portfolio $ goal, it was not meant to be blindly deployed as an actual withdrawal approach - I don't know anyone who plans to.

Uh-oh... (We were hoping to be able to... )

Quote:

Interesting but not a lot of detail, something for me to play around with...

The 4 Percent Rule: Static Decisions In A Dynamic World

I'll be reading...

[audreyh1]

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Originally Posted by pb4uski As a practical matter, I would be less inclined to spend any excess early and more inclined to spend it later - but that is just my being naturally conservative and wanting to be highly confident that we'll never be a burden to DD and DS.

The sooner you can figure out that you can spend a wee bit more, the better IMO. The problem with waiting is that you are older and might not be as healthy (or even alive). I want to spend it when I (or my beneficiaries) can enjoy it the most - soon.

[GLM]

Thanks for posting the link. It was a bit of a new twist and an interesting read.

I like how his example demonstrates what flexibility can do for the probability of success, cost of surplus and present value of withdrawals.

I will be looking to see if he gives examples for a longer time span .....

Still it always seems flexibility is the key ..

[boatfishandnature]

Quote:

Originally Posted by pb4uski Yes, willy-nilly - a subjective ongoing reassessment of how much I can spend and not run out of money. I might be right, I might be wrong, but nothing in life is guaranteed. One way I think of it is that anything in excess of 0% failure under Firecalc could be spent if I chose to. As a practical matter, I would be less inclined to spend any excess early and more inclined to spend it later - but that is just my being naturally conservative and wanting to be highly confident that we'll never be a burden to DD and DS. However, if you find a magic potion - please feel free to share.

This may be obvious, but, I think the point is that you need to build something that may look like an "excess" in good return periods (which may be long) in order to be able to weather bad return periods (which may also be long ).

So, if after 10 consecutive years of great returns you adjust your withdrawals significantly upwards and then that is followed by 10 years of well below average returns, you may be in trouble. Some of those other methodologies try to create some more disciplined way to adjust the withdrawals according to changing circumstances.

[walkinwood]

Quote:

Originally Posted by Midpack Hmmm... I guess I need to read up on Guyton's decision rules again, last time I did it seemed most here were having a hard time understanding his methodology. Can you describe the rules in simple terms?

Here's a link to his paper. There was a follow-up paper that I can't find right now.

http://cornerstonewealthadvisors.com...iteArticle.pdf

There is an earlier version of this paper too which used historical data
http://cornerstonewealthadvisors.com...%20Article.pdf

The rules are quite detailed, so please read them in the doc. Its been a while since I read them. I created a spreadsheet using them, but cannot swear to its accuracy. (that was 5 1/2 years ago!)

http://www.early-retirement.org/foru...les-29684.html

[Lsbcal]

Dynamic and static methods, nice way to categorize this and it even sounds hot.

I've mentioned that when I run FIRECalc I'm a fan of using the selection at the bottom of the "investigate" tab:



By running the simulation for a shortish period like 20 years I make sure that (1) the portfolio will not approach near death situations before recovering, (2) there is something there after 20 years to take care of us in our "really old" age i.e. too old to travel much and be active.

I think the wording on this choice (estate) can be deceptive because it implies one is just going to leave it all for the heirs. Depends on how you use the tool. I guess you could say I favor the piecewise linear method -- another hot term .