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Old 08-17-2008, 07:44 AM   #21
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Did anyone take a look at Kitces report?

He suggests that the 4% to 4.5% range (to mark the starting WD amount) is too conservative for some. Especially of the market is down when the WD amount is established.

He suggests that PE ratio might be a good indicator to help people establish the beginning WD Rate to establish the initial WD amount.


http://www.kitces.com/assets/pdfs/Ki...t_May_2008.pdf
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Old 08-17-2008, 08:24 AM   #22
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Originally Posted by chinaco View Post
He suggests that PE ratio might be a good indicator to help people establish the beginning WD Rate to establish the initial WD amount.

http://www.kitces.com/assets/pdfs/Ki...t_May_2008.pdf

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Old 08-17-2008, 08:31 AM   #23
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Ho*us, is that you?
Did you even look at the thread?

You are a waste of disk space.
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Old 08-17-2008, 09:05 AM   #24
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The Norwegian widow would like to point out two important weekend facts - sans spreadsheet calc.'s:

1. The Saint's lost to the Texans - in the Superdome yet.

2. SEC Yield listed on the Vanguard website this Sunday is 4.71% for:

Yeah you rite! Pssst - Wellesley!

heh heh heh -
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Old 08-17-2008, 09:07 AM   #25
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I guess as long as we've got pundits on one side saying 4% is too high, and another set of pundits on the other side saying its too conservative...
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Old 08-17-2008, 10:00 AM   #26
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Interesting article. Thanks!

Audrey
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Old 08-17-2008, 11:57 AM   #27
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Wow, good article. Based on his findings, since the current overall P/E ratio is 28 right now, a 4% SWR is about right on for someone retiring this year, since the P/E ratio is still in the overvalued range, though it is nowhere near how bad it was at the peak in 2000. Someone trying to retire in 2000 probably would have only had a SWR of 2.5-3%.

It seems higher SWR's would be possible if the P/E ratio were to go down further, he states about 4.5% if it were to go down to 20 and 5.0% if it were to go down to 12.
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Old 08-17-2008, 01:32 PM   #28
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Great article. Thanks for posting. In looking through his web-site, I found this article in his blog & the link to the original article at the end of his post. Entertaining, but I will not be making any decisions based on it.

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Old 08-17-2008, 01:51 PM   #29
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One of the assumptions that seems to be in all of the models is using a constant equities/fixed income ratio. Reality says that when the market tanks people are hesitant to move "safe" fixed income dollars into the declining stock market. In minor, short term drops this is probably a mistake. However, in the few "retirement killer" periods keeping cash is probably the best way to prolong the portfolio's life.

1929 starts a big drop. Rebalancing annually moves cash into the market which continues to be slaughtered for several more years. 1970 is another period of collapse where annual rebalancing costs equity dearly and cash disappears from the faithful reallocation.

I'm curious what the real survival numbers are if the rebalancing was only one way. As the market goes up, assets are shifted to keep the fixed income portion from falling too low.

I haven't tried to recreate Dory's numbers but I've made some simple "what ifs" if the market falls but I keep my cash intact. My cash, pension and interest income can pretty much carry me for over a decade. Assuming the stock market doesn't go to zero, I'd be able to rebalance to keep the cash up but it's highly likely that within a decade the equities would recover.

Any thoughts?
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Old 08-17-2008, 02:29 PM   #30
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Yep. If the stock market goes to zero or anywhere near zero, your cash and pensions probably wont be worth anything either.
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Old 08-17-2008, 02:31 PM   #31
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I wonder. 10 years from now what will the 4% rule mutate into..
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Old 08-17-2008, 02:56 PM   #32
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One of the assumptions that seems to be in all of the models is using a constant equities/fixed income ratio. Reality says that when the market tanks people are hesitant to move "safe" fixed income dollars into the declining stock market. In minor, short term drops this is probably a mistake. However, in the few "retirement killer" periods keeping cash is probably the best way to prolong the portfolio's life.

1929 starts a big drop. Rebalancing annually moves cash into the market which continues to be slaughtered for several more years. 1970 is another period of collapse where annual rebalancing costs equity dearly and cash disappears from the faithful reallocation.

I'm curious what the real survival numbers are if the rebalancing was only one way. As the market goes up, assets are shifted to keep the fixed income portion from falling too low.

I haven't tried to recreate Dory's numbers but I've made some simple "what ifs" if the market falls but I keep my cash intact. My cash, pension and interest income can pretty much carry me for over a decade. Assuming the stock market doesn't go to zero, I'd be able to rebalance to keep the cash up but it's highly likely that within a decade the equities would recover.

Any thoughts?
I, too, have built up enough cash to draw on for up to 10 years while re-balancing my portfolio to maintain 40% equities. If the market does not recover within a decade then I'm sure I would be re-thinking the strategy. Staying the course is a good mantra, but at some point you need to start looking for a lifeboat rather than go down with the ship.
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Old 08-18-2008, 03:22 PM   #33
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I'm curious what the real survival numbers are if the rebalancing was only one way. As the market goes up, assets are shifted to keep the fixed income portion from falling too low.

Any thoughts?
While not exactly following what you are suggesting, there was an article in the Journal of Financial Planning in June 2007 - Is Rebalancing a Portfolio During Retirement Necessary.

From the article:
"The study uses two analysis methods: bootstrap and historical inflationadjusted rates of return in their true temporal order. Both methods find that rebalancing provides no significant protection on portfolio longevity, and this holds for all withdrawal periods. In fact, in some cases, rebalancing increases the number of shortfalls.

Withdrawing bonds first, over stocks, performs the best of all the methods, though the resulting stock-heavy portfolio may make some investors uneasy, This method also is most apt to leave a larger remaining balance at the end of 30 years, while rebalancing leaves the smallest amount."

I plan to rebalance to my set asset allocation. It was easy during the accumulation phase, but only time will tell how consistently I do it in the future.
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Old 08-18-2008, 09:05 PM   #34
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Funny how neither the BusinessWeek article nor any posts on this thread so far mentioned age. But life expectancy is really the primary factor that will determine what a safe withdrawal rate is, assuming the typical definition of "safe" (not broke before death).

Futzing about whether it's 4% or 4.1% or 4.5% with a low P/E or whatever - it matters much more whether the subject is a 70 year old single man or a 60 year old couple FIREing. The former could probably safely take 8%, with less than 2% chance of being broke before death.

Too bad none of the retirement calculators online - or even ESPlanner - incorporate actuarial information. A plot to get us to oversave, or perhaps just a symptom of our collective psychological aversion to being realistic about our mortality?
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Old 08-18-2008, 10:04 PM   #35
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Here is a page from the Retire Early website where there is a LOT of information on SWR and especially as it relates to age at retirement (years in retirement) and the Safe Withdraw Rate for your asset mix and life exceptancy.

Combining Safe Withdrawal Rates and Life Expectancy


For those of us who are already retired and too lazy to follow the link here is the text.

"With all the worry that the current bear market means they'll run out of cash, most folks have forgotten that there are many things that will actually improve your safe withdrawal rate -- and some of them are easily to calculate with a tremendous degree of accuracy.
For example, there is a large body of data on average life expectancy and how many people will likely live to be 100. If you choose a long pay out period, there is only a small chance you'll actually live long enough to be in a position to run out of money.
The table below is based on a 40-year pay out period and 79% stock, 21% fixed income. The "99% safe" withdrawal rate is 4.10%, "95% safe" rate is 4.23%, and "90% safe" rate is 4.57%.
Using the IRS 2003 Mortality Table we get the following:
A 65-year-old has a 1% chance (99th percentile) of living another 40 years to age 105.
A 60-year-old has a 5% chance (95th percentile) of living another 40 years to age 100.
A 57-year old has a 10% chance (90th percentile) of living another 40 years to age 91.
Combining the probabilities of the portfolio running dry and the odds that our retiree will actually live long enough to see his portfolio run dry yields the following table (see Note (1) below):
Joint Probability
Portfolio Survivability & Life Expectancy

0.20% expense ratio, inflation indexed to CPI-U, January start date, $1,000 initial balance,
Stock allocation in S&P500, remainder of the portfolio in 3-6 month commercial paper
based on Shiller's 1871-2001 database..
----40-Year Pay Out Period-----
Odds of Living 40 Years
Beyond Current Age
3.90% (99% safe)4.13% (95% safe)4.26% (90% safe)65-year-old (1% odds)99.96%99.76%99.47%60-year-old (5% odds)99.8%99.2%98.6%57-year-old (10% odds)98.3%96.6%95.3%Note (1): The combined probabilities were calculated by examining each of the 92 forty-year pay out periods from 1871-2002 with a January starting date and determining the chance that portfolio would run dry in that year and multiplying that probability by the chance that the retiree would still be alive in the year the portfolio ran dry. The sum of these joint probabilities calculated for each of the 40-year pay out periods examined is the figure reported in the table above. Pretty amazing, huh? A 5% chance that your portfolio runs dry in 40 years, combined with a 5% chance you'll die in less than 40 years, still keeps your overall financial picture solvent more than 99% of the time."


Or, this one on a Bear market and SWR where the starting year for the SWR was 1929...can't get much worse than that for a 30 year retirement period. The SWR for the period was 3.9%. There was still money in the account at the end of the 30 year period.
Retiring at the Worst of Times.

A SWR of around 4% "should" last you at least 30 years unless the market is ever worse than the period after 1929, 1973 or 2002.

Who invented it is less important than the fact that it works for most folks with appropriate adjustments for years in retirement and asset mix. Fees and rebalancing are also very important to keep this SWR near 4%. The data suggests that a SWR of 3.7-4.?% should be adequate for even the worse market years.
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Old 08-19-2008, 03:27 AM   #36
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Funny how neither the BusinessWeek article nor any posts on this thread so far mentioned age. But life expectancy is really the primary factor that will determine what a safe withdrawal rate is, assuming the typical definition of "safe" (not broke before death).
Longevity and the age at which one retires can make a difference. I think the white paper mentioned a portfolio lasting 30 years... for the analysis?? Most of these studies have a defined period of time.

If you intend to draw down for 40 or 45 years... I think the (max) starting amount (%) is reduced.

However, for many people... 40 years would mean that people are ER. Most will have a reduction in the amount they need pull from their portfolio due to SS kicking in (at least).

For us... If I ER at 55. I need to cover 7 years from the portfolio. I will have a small pension that will cover some of our needs... But let's say we need 5 or 6% per year in that 7 years. At 62, DW begins SS... the amount pulled from the portfolio drops by 1.5%. At 66 I begin my SS... the amount pulled from the portfolio drops by another 1.5%. The numbers cited are not absolutely correct... but it makes the point.

Plus, as we age, we will likely spend less money. For example we will probably spend less at 85 than at 65. The wild card here is inflation on things like medical and/or having expensive medical problems.

The other contingency that needs to be considered is the early death of one spouse. In retirement, losing one of the SS payments (and perhaps reducing the amount of a private pension) due to a death would reduce those income streams and could require more to be drawn from the portfolio.

There are a number of what-if scenarios to consider. Identifying those situations and a contingency plan is pretty important.
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Old 08-19-2008, 07:49 AM   #37
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other contingency that needs to be considered is the early death of one spouse. In retirement, losing one of the SS payments (and perhaps reducing the amount of a private pension) due to a death would reduce those income streams and could require more to be drawn from the portfolio.

There are a number of what-if scenarios to consider. Identifying those situations and a contingency plan is pretty important.

I think it is virtually impossible to identify all the things that could befall you that would affect your finances . The best you can do is just hope you have a solid plan and retire.
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Old 08-19-2008, 02:37 PM   #38
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I believe for most of us without a secure 100% COLA pension, measure, compute, plan, execute, review, adjust, repeat..is about all we can do once we know our "number".

Measure your current living expenses...everything not just the big stuff, over at least 5 years. Add up all your fixed expenses and then add the discrepancy expenses plus a conservative inflation factor.

Compute your best guess at what you will spend once retired. Compute all your income sources and then see what you need to have in assets to pay the difference annually over your expected lifespan.

Plan how you are going to get the needed assets or how you are going to liquidate or otherwise create an income stream from them that will last as long as you will plus a fudge factor in case you were wrong and outlived your estimate or inflation was worse than you guessed etc.

Execute your plan.

Review your assets, income and your plan as often as you feel necessary.

Review annually and adjust SWR, spending, and asset allocation.

Your SWR is unique to you. All the studies and data available only tell you what "might" work for a stated portfolio based on the history of the financial markets over the past 100+ years. If you want or need to spend more than account for it in your "number". If you spend less then you won't need as much of a nest egg and can retire earlier.

It is really pretty simple but you need to do your homework. Once you know how you want to live in retirement the rest is not all that complex.

Haggling over an actual percent SWR is a waste of time unless you are very very close to having enough to retire. If a person is that close then perhaps waiting a bit might be prudent.

Once you pull the trigger and retire you still have options to change your lifestyle so again an exact percent SWR is really meaningless in the bigger picture but periodically reviewing and adjusting your spending and/or income is a really good idea.
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Old 08-19-2008, 08:34 PM   #39
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Here is a page from the Retire Early website where there is a LOT of information on SWR and especially as it relates to age at retirement (years in retirement) and the Safe Withdraw Rate for your asset mix and life exceptancy.

Combining Safe Withdrawal Rates and Life Expectancy


For those of us who are already retired and too lazy to follow the link here is the text.

"With all the worry that the current bear market means they'll run out of cash, most folks have forgotten that there are many things that will actually improve your safe withdrawal rate -- and some of them are easily to calculate with a tremendous degree of accuracy.
For example, there is a large body of data on average life expectancy and how many people will likely live to be 100. If you choose a long pay out period, there is only a small chance you'll actually live long enough to be in a position to run out of money.
The table below is based on a 40-year pay out period and 79% stock, 21% fixed income. The "99% safe" withdrawal rate is 4.10%, "95% safe" rate is 4.23%, and "90% safe" rate is 4.57%.
Using the IRS 2003 Mortality Table we get the following:
A 65-year-old has a 1% chance (99th percentile) of living another 40 years to age 105.
A 60-year-old has a 5% chance (95th percentile) of living another 40 years to age 100.
A 57-year old has a 10% chance (90th percentile) of living another 40 years to age 91.
Combining the probabilities of the portfolio running dry and the odds that our retiree will actually live long enough to see his portfolio run dry yields the following table (see Note (1) below):
Joint Probability
Portfolio Survivability & Life Expectancy
0.20% expense ratio, inflation indexed to CPI-U, January start date, $1,000 initial balance,
Stock allocation in S&P500, remainder of the portfolio in 3-6 month commercial paper
based on Shiller's 1871-2001 database..
----40-Year Pay Out Period-----Odds of Living 40 Years
Beyond Current Age3.90% (99% safe)4.13% (95% safe)4.26% (90% safe)65-year-old (1% odds)99.96%99.76%99.47%60-year-old (5% odds)99.8%99.2%98.6%57-year-old (10% odds)98.3%96.6%95.3%Note (1): The combined probabilities were calculated by examining each of the 92 forty-year pay out periods from 1871-2002 with a January starting date and determining the chance that portfolio would run dry in that year and multiplying that probability by the chance that the retiree would still be alive in the year the portfolio ran dry. The sum of these joint probabilities calculated for each of the 40-year pay out periods examined is the figure reported in the table above. Pretty amazing, huh? A 5% chance that your portfolio runs dry in 40 years, combined with a 5% chance you'll die in less than 40 years, still keeps your overall financial picture solvent more than 99% of the time."


Or, this one on a Bear market and SWR where the starting year for the SWR was 1929...can't get much worse than that for a 30 year retirement period. The SWR for the period was 3.9%. There was still money in the account at the end of the 30 year period.
Retiring at the Worst of Times.

A SWR of around 4% "should" last you at least 30 years unless the market is ever worse than the period after 1929, 1973 or 2002.

Who invented it is less important than the fact that it works for most folks with appropriate adjustments for years in retirement and asset mix. Fees and rebalancing are also very important to keep this SWR near 4%. The data suggests that a SWR of 3.7-4.?% should be adequate for even the worse market years.
Thanks for the post. It always amazes me that people who are smart enough to figure out that they shouldn't do retirement planning with a single interest rate turn around and plan with a single date of death.

The "better" way to handle mortality is by multiplying the probabilities as you've shown.
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Old 08-20-2008, 02:38 AM   #40
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Thanks for the post. It always amazes me that people who are smart enough to figure out that they shouldn't do retirement planning with a single interest rate turn around and plan with a single date of death.

The "better" way to handle mortality is by multiplying the probabilities as you've shown.

Yes... and it sure shows the importance of systems like SS. If it didn't exist, many/most would probably wind up in the streets.... because the vast majority do not know how to do that type of money management or planning.
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