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Old 08-20-2008, 04:34 AM   #41
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The intricacies involved in this discussion of the 4% solution are enough to make my head spin - and it's not even CH. I'm still so glad I learned about the 4% solution several years ago. Even if it's flawed, it gives a starting point and is sufficiently conservative to prevent most of us from going broke in early retirement.

In reality, I still don't feel comfortable in following the plan exactly. I plan to limit my WDR to 4% or less each year. I'll not adjust for inflation, but rather start fresh each year and calculate 4%. When I see how that works for a while (NW going up or down) I may reevaluate and increase or decrease spending. During "bad" years, I'll definitely decrease WDR.

The point is, I now have high confidence that I can survive early retirement as long as I stick close to the 4% WDR and stay flexible. It's very liberating! Whoo hooo!
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Old 08-20-2008, 09:28 AM   #42
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Originally Posted by Koolau View Post
The intricacies involved in this discussion of the 4% solution are enough to make my head spin - and it's not even CH. I'm still so glad I learned about the 4% solution several years ago. Even if it's flawed, it gives a starting point and is sufficiently conservative to prevent most of us from going broke in early retirement.

In reality, I still don't feel comfortable in following the plan exactly. I plan to limit my WDR to 4% or less each year. I'll not adjust for inflation, but rather start fresh each year and calculate 4%. When I see how that works for a while (NW going up or down) I may reevaluate and increase or decrease spending. During "bad" years, I'll definitely decrease WDR.

The point is, I now have high confidence that I can survive early retirement as long as I stick close to the 4% WDR and stay flexible. It's very liberating! Whoo hooo!
During bad years, however, not only does your portfolio go down, say 15%, but you want to decrease your SWR from 4 to 3.5% or whatever? That is a 25.6% decrease in amount of money taken out. Not saying it is impossible, because it is possible to change spending, just that with inflation it may be harder to accomplish this than it looks.
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Old 08-20-2008, 11:26 AM   #43
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Most people use the 4% SWR as the starting position and do not reset it each year. That way the good years can build up a buffer for the bad years, preventing the need to adjust up and down every year.

Make sure to use a liberal assumption for inflation and do not accept government figures on faith.
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Old 08-20-2008, 05:20 PM   #44
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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
Finally got around to reading this today, thought it was very interesting, thanks for pointing it out...
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Old 08-20-2008, 05:41 PM   #45
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Most people use the 4% SWR as the starting position and do not reset it each year. That way the good years can build up a buffer for the bad years, preventing the need to adjust up and down every year.

Make sure to use a liberal assumption for inflation and do not accept government figures on faith.
They are playing with this over at Bogleheads forum. What really really ticks me off - where's the real money?? - aka Psst Wellesley dividends and interest!! rant rant rant .

Why not live forever like Anthony Quinn planting the tree in the movie I forgot the name of.

The Norwegian widow gets no respect! Spreadsheets/sims/calc's. and all that produce all kinds of fun numbers but dividends and interest are almost as good as real money (Yogi Berra, famous guru).

"Do or do not - there is no try." Yoda.

heh heh heh - at 65, after 15 yrs of ER practicing, I get back to ya when I get it figured out. Meanawhile I play with FireCalc, ORP and do what I think is ok.
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Old 08-20-2008, 06:00 PM   #46
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They are playing with this over at Bogleheads forum. What really really ticks me off - where's the real money?? - aka Psst Wellesley dividends and interest!! rant rant rant .
You're absolutely right Uncle Mick.

The theory says, accumulate, accumulate, then when you're ready to drawdown, take no more than 4% of your nest egg as a starting amount. And adjust for inflation and/or bad market results every year thereafter. If you don't take more than 4% you won't outlive your money.

What everyone forgets is that earnings (that Psst-thingy you always talk about), plus results from annual rebalancing can result in an initial (or subsequent) drawdown of of less than 4% of the original nest egg.

What's missing from this discussion is the overall cash management policy that each retiree needs to define so they know how to manage their money. The SWR is a part of that policy -- but not the total cash management policy.

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Old 08-22-2008, 04:06 PM   #47
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You're absolutely right Uncle Mick.
What everyone forgets is that earnings (that Psst-thingy you always talk about), plus results from annual rebalancing can result in an initial (or subsequent) drawdown of of less than 4% of the original nest egg.
I thought that the SWR studies assumed that withdrawals are taken first from dividends, interest and distributions, and if any remains, it is reinvested. What am I missing?

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What's missing from this discussion is the overall cash management policy that each retiree needs to define so they know how to manage their money. The SWR is a part of that policy -- but not the total cash management policy.

-- Rita
I'm interested in hearing more about the "Cash management policy". Do you mean the order of withdrawals from different accounts, the way dividends, interest and distribution are used?

Being in my first year of ER, I'm still trying to figure the mechanics of the withdrawls, so all info in appreciated.
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Old 08-22-2008, 04:42 PM   #48
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I'm interested in hearing more about the "Cash management policy". Do you mean the order of withdrawals from different accounts, the way dividends, interest and distribution are used?

Being in my first year of ER, I'm still trying to figure the mechanics of the withdrawls, so all info in appreciated.
I'm far from an expert on this and like things to be simple but here are my plans.

I'm due to retire early 2010 and I expect to need $30K in my first year. (pension will be $60k/year).

My after tax savings are currently paying ~$20K in dividends which I will be paying into my cash bucket. That cash bucket will have 5 years of expenses already in it by then ($150K). Each year I'll re-balance so that my nest egg maintains its allocation of stocks and bonds.

If/when I start to run out of funds in the cash bucket I'll have to start thinking about selling MF shares to pay for my expenses, but 7 years after ER we'll both be eligible for SS so that's another income stream coming in.
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Old 08-22-2008, 05:23 PM   #49
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I thought that the SWR studies assumed that withdrawals are taken first from dividends, interest and distributions, and if any remains, it is reinvested. What am I missing?


I'm interested in hearing more about the "Cash management policy". Do you mean the order of withdrawals from different accounts, the way dividends, interest and distribution are used?

Being in my first year of ER, I'm still trying to figure the mechanics of the withdrawls, so all info in appreciated.
WnW,
The SWR is simply a percentage of the retiree's starting portfolio -- how one does the Withdrawal is up to them. The theory then is that the beginning Withdrawal amount is adjusted for inflation. AND, if you are following the 95% rule, in a down year, your withdrawal will be no more than 95% of the prior year's amount.

I've been struggling with the concept as well, as it is my first year in retirement.

My comment to Uncle Mick about a cash management policy re: an overly long discussion about whether 4% or 6% or some other % is 'safe.' That discussion totally ignores the intent of the safe withdrawal rate, which is only the beginning number. As he's proven for the last 15 years, his withdrawal rate is sometimes less than 4%, sometimes more than 6% AND there is still plenty of funds available after 15 years.

I've read those discussion ad infinitum, and there are many excuses why one can draw 5% and someone can draw 4%, but no where does anyone incorporate the SWR into an overall cash management policy (and investment policy as well). For newbies, these two policies are the first decision points to be made -- then deciding what the SWR amount will be for the first year is the next decision.

My cash management policy outlines which accounts will be tapped in order, how I determined my emergency reserve and where the funds are located, and how the withdrawals will be run through my bank to cover expenses. My investment policy is simply my asset allocation and when I plan on rebalancing.

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Old 08-22-2008, 06:26 PM   #50
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This can really get complicated. Overly so if you work at it.
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Old 08-22-2008, 09:43 PM   #51
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WnW,
The SWR is simply a percentage of the retiree's starting portfolio -- how one does the Withdrawal is up to them. The theory then is that the beginning Withdrawal amount is adjusted for inflation. AND, if you are following the 95% rule, in a down year, your withdrawal will be no more than 95% of the prior year's amount.
Rita,
I think you may be confusing two different withdrawal paradigms. At the risk of using the wrong terms, I'll give it a shot:
- The "conventional" strategy that I think most folks start with is a X% of the portfolio's beginning balance adjusted each year for inflation. After the first year, your withdrawal amount each year is simply the amount you took out the previous year plus an inflation adjustment.
- The "95% rule" you mentioned is from Bob Clyat's book. Using this method, you take out X% of your portfolio's value at the beginning of the year. There is no inflation adjustment: If your investments do well, you take out more money. If the investments go down 30% in value, you get 30% less money the next year. The 95% rule is a slight modification to this method--it says that even f your investments go down in value a lot, you still withdraw 95% of the amount you took out in the previous year, rather than the normal (lower) X% of your portfolio amount. Historically, using the 95% rule has not reduced overall success of these portfolios, and it's a more acceptable approach for many folks (who can't absorb a 10-20% rapid reduction in their "take" from year-to-year).
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Old 08-22-2008, 10:25 PM   #52
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Unclemick's exceedingly complicated lefthanded unified general theory of chickenheartedness - jan 2006 version.

Note this is 60% of retirement income nowadays with 40% being a non cola pension plus early SS.

1. If I feel ok - take 5% of 12/31 portfolio balance into Prime MM and live the following year.

2. If I'm scared - take the SEC yield of my portfolio 12/31 and use that.

3. If I'm totally panicked - live off my one year or so petty cash float while I resurrect my cheap bastardhood notes and relearn how to live on less than 27k in current $(SS plus pension) - reinvesting everything else.

heh heh heh - And if this gets too complicated in my old age - Pssst Wellesley and party. .

P.S. If I realize that I was too cheap - take a little more one year and remodel/take some extra trips/eat out a little more/ a little more for charity, etc.
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Old 08-23-2008, 03:16 AM   #53
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Unclemick's exceedingly complicated lefthanded unified general theory of chickenheartedness - jan 2006 version.

I suspect that your model is followed by more people than the 4% rule. Which may elevate it from theory to unified general law of chickenheartedness.
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Old 08-23-2008, 07:42 AM   #54
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I suspect that your model is followed by more people than the 4% rule. Which may elevate it from theory to unified general law of chickenheartedness.
I'm planning on a similar version. I will have very little pension and plan on delaying SS until age 70 so I have a double budget.

Budget 1 will be a nice lifestyle but without travel or luxuries. That will require a SWR of about 2%. This could be cut even further but I'd probably start SS early before I did.

Budget 2 adds to the basic living expense budget and can grow or contract as my fear does. Right now, I estimate Budget 2 equals Budget 1. If the "bull" returns, I might not know what to do with all the extra.

I have 40% of my portfolio in cash/fixed income. That is enough for about 7 or 8 years of both budgets. If I went to Budget 1 only, it's enough for over 20 years. I've been playing with the idea of separating my funds where the cash/fixed goes only to Budget 1 with equities funding Budget 2. That may make my lifestyle too dependent on the stock market but it would certainly keep me from running out of money. It would automatically increase my cash level in a falling market. I would never move money from cash to equities. If the market moves up, that's when I'd replenish my cash position and have more for luxuries and travel.

Ah yes, the endless philosophical debates. Unclemic has the right idea. Just live.
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Old 08-23-2008, 08:48 AM   #55
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Unclemick's exceedingly complicated lefthanded unified general theory of chickenheartedness - jan 2006 version.

Note this is 60% of retirement income nowadays with 40% being a non cola pension plus early SS.

1. If I feel ok - take 5% of 12/31 portfolio balance into Prime MM and live the following year.

2. If I'm scared - take the SEC yield of my portfolio 12/31 and use that.

3. If I'm totally panicked - live off my one year or so petty cash float while I resurrect my cheap bastardhood notes and relearn how to live on less than 27k in current $(SS plus pension) - reinvesting everything else.

heh heh heh - And if this gets too complicated in my old age - Pssst Wellesley and party. .

P.S. If I realize that I was too cheap - take a little more one year and remodel/take some extra trips/eat out a little more/ a little more for charity, etc.
Give the man another medal! He's brilliant!

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Old 08-24-2008, 09:36 AM   #56
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SteveR,
Nice post. As you say, doing this ER thing over the long run requires getting comfortable first with all the data/studies/issues of withdrawals, and then cycling repeatedly through your situation, the markets, your spending, your needs, your performance. It isn't necessarily easy or stress-free, but it beats the heck out of working for 20 or 30 extra years in a job you dislike!
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Old 08-24-2008, 01:13 PM   #57
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What Bob said x 1000!

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