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Old 07-20-2013, 08:34 PM   #21
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Whatever the base number nowadays, I'd love to hear a SWR process which is better balanced, something with reasonable protection against bad events (but no extreme paranoia), something benefiting from good events (without betting the farm on it), something realistic compared to the reality of one's life (please don't wildly swing spending from X to 2X or 0.5X within a few years)... I have yet to read it...
This topic has been under discussion for centuries. See The Quest for the Holy Grail
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Old 07-20-2013, 08:59 PM   #22
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Originally Posted by REWahoo View Post
This topic has been under discussion for centuries. See The Quest for the Holy Grail


All right, touché!

(although you have to acknowledge that the holy grail is often viewed as something oh-so-simple, just a basic cup made in wood...)
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Old 07-20-2013, 10:14 PM   #23
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Oh, you probably wanted a more complete answer. How about "35"?

In other terms, how about 68.5% of the time? (edit - reading error on my part, failures were 100-68.5, so 31.5%, or about 1/3 of the time) ?



More here (this sets the portfolio at 4% spend on a $1M portfolio, 0.18% fees, and a $500,000 'floor' for failure):

FIRECalc: A different kind of retirement calculator

So yes, a 75/25 portfolio has historically dipped below 50% over 2/3rds (edit: about 1/3rd) of the time.

-ERD50
Sorry, I thought you meant the portfolio took a 50% haircut due to market losses alone. You are talking about including withdrawals, right?
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Old 07-20-2013, 10:42 PM   #24
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Sorry, I thought you meant the portfolio took a 50% haircut due to market losses alone. You are talking about including withdrawals, right?
Right, that example was with the 4% WR.

If you have a portfolio, and you don't make any withdrawals, does it make a sound when it crashes?


But to humor you, here's a run with no withdrawals - I limited to 5 years, as that is where the trough appeared on a 30 year run, so I could get an ending portfolio number. The two year dip is close. Yikes! :

FIRECalc: A different kind of retirement calculator

No drops of 50%, but:

Quote:
Here is how your portfolio would have fared in each of the 136 cycles. The lowest ... portfolio balance throughout your retirement was $610,198 ...
pretty close.

I hope I didn't offend with my earlier response, I was just having a little fun. Data runs get pretty dry.


-ERD50
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Old 07-20-2013, 11:25 PM   #25
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http://cornerstonewealthadvisors.com...iteArticle.pdf

Basically creates "financial guard rails" for withdrawals, capping Inflation increases at 6%, lowering withdrawals if the WR rises more than 20% above the original and increasing when WR drops more than 20% of the original. This is some heavy going, a fairly technical paper, but worth reading.
As I understand it if you start with a 4% WR and sometime later the inflation adjusted amount and the size of your portfolio makes the actual WR either over 4.8% or under 3.2% would mean you would NOT take that amount but would,lower it by 10%, or increase it, respectively.
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Old 07-21-2013, 08:58 AM   #26
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Now we're speaking... I read it once (with an open mind), need to read it again (with a skeptical mind!), but I really like their general line of reasoning. Capital preservation rule, prosperity rule, eliminate inflation rule, try to start high and enjoy life while staying adaptive and very cautious about the final outcome, etc, this all seems VERY WELL grounded in common-sense and sensible logic.

What I also really like that it seems to auto-adjust by itself, whatever happens. So to a large extent, it should auto-correct even if the future is way different from what we've seen in the past. Now THAT is very re-assuring.

The only reservation I have is that the 20% threshold triggers and 10% rate adjustments (reduction or increase) seem a tad discontinuous. I would have expected something more incremental.

Now of course, the $1M question is... Did they get it right with their financial model, was it validated enough by peer reviewers, are the conclusions (which seems amazingly rosy) correct? 5% to 6% initial WR, that seems a lot...

Anybody aware of further analysis on this paper? Seems rather ground breaking to me? Or... is it a fake Holy Grail?
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Old 07-21-2013, 09:17 AM   #27
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http://cornerstonewealthadvisors.com...iteArticle.pdf

Basically creates "financial guard rails" for withdrawals, capping Inflation increases at 6%, lowering withdrawals if the WR rises more than 20% above the original and increasing when WR drops more than 20% of the original. This is some heavy going, a fairly technical paper, but worth reading.
As I understand it if you start with a 4% WR and sometime later the inflation adjusted amount and the size of your portfolio makes the actual WR either over 4.8% or under 3.2% would mean you would NOT take that amount but would,lower it by 10%, or increase it, respectively.
I skimmed the article. I was looking for statistics on withdrawal amounts. How often did the real withdrawal amount fall below the initial amount? What was the lowest annual withdrawal amount?

I didn't see numbers like this in the tables. It seems that if I were going to use a rule like this, I'd want some idea of the probability and severity of reduced withdrawals.
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Old 07-21-2013, 09:47 AM   #28
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SWR's are enormously impacted by rate of inflation used yet for the most part, a government estimate based on a basket of goods that has little relevance to any individual is used out of convenience. My experienced inflation has been much lower than the CPI. The "average" healthcare costs often cited also scares a lot of people into not spending. In a forum dominated by probabilities and likely scenarios, the chances that one is going to experience these health costs is dramatically reduced just by walking 20 minutes a day. So take a walk, manage you individual circumstances and live the life that makes you happy.
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Old 07-21-2013, 10:11 AM   #29
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I think that the article should have touched on the expenses. Someone could mistakenly think that they could hire an advisor and still take 4%.

fire calc is .18 expense(pretty low) on a 75/25 portfolio
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Old 07-21-2013, 11:07 AM   #30
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I skimmed the article. I was looking for statistics on withdrawal amounts. How often did the real withdrawal amount fall below the initial amount? What was the lowest annual withdrawal amount?

I didn't see numbers like this in the tables. It seems that if I were going to use a rule like this, I'd want some idea of the probability and severity of reduced withdrawals.
I'd suggest you take the time to thoroughly read it. Was very worth it to me.

In the tables at the end, you see the avg # of trigger events (cuts/freezes/raises). Should answer your first question. You'll also find the PP (purchasing power) column, which will partly answer your 2nd question. I would indeed have liked to see a quantified lowest number, as you suggested... More precisely, I would have liked to see the effect of a floor limit on such lowest withdrawal amount (and maybe a ceiling too).

I tried to find some solid discussion about this fascinating article on the Bogleheads forum, but so far, I've had limited luck, just a few references in passing.
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Old 07-21-2013, 12:17 PM   #31
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Whatever the starting number nowadays, I'd love to hear a self-adjusting SWR process which is better balanced, something with reasonable protection.
Also http://schulmerichandassoc.homestead...l_Profiles.pdf

Guyton's original paper was obtuse and the allocation/trading part was incomprehensible, IMHO. But when Klinger came along and changed the focus to withdrawals, it all made sense.

A cool (?) part is that you can arguably bump up the SWR to 5% and still be safe. What saves you is the pre-defined, automatic reductions of withdrawals when the portfolio gets whacked by a bear.

The reason that the standard SWR is 4% is that there is no automatic mechanism for cutting back in bad times.
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Old 07-21-2013, 12:35 PM   #32
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The problem with WR reduction is that for some people, it may mean a drastic change in lifestyle, such as going into the boondocks in an RV. And they are scared of it.
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Old 07-21-2013, 01:16 PM   #33
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The problem with WR reduction is that for some people, it may mean a drastic change in lifestyle, such as going into the boondocks in an RV. And they are scared of it.
Going into the boondocks in an RV would involve an increase over my current expenses - but I still want to do it
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Old 07-21-2013, 02:30 PM   #34
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I'd suggest you take the time to thoroughly read it. Was very worth it to me.

In the tables at the end, you see the avg # of trigger events (cuts/freezes/raises). Should answer your first question. You'll also find the PP (purchasing power) column, which will partly answer your 2nd question. I would indeed have liked to see a quantified lowest number, as you suggested... More precisely, I would have liked to see the effect of a floor limit on such lowest withdrawal amount (and maybe a ceiling too).

I tried to find some solid discussion about this fascinating article on the Bogleheads forum, but so far, I've had limited luck, just a few references in passing.
Thanks. You're correct, those provide number of times but not severity. I still think that severity is important. Maybe I feel strongly that any year with spending below $D is a "failure".

Some years ago I tested a much simpler rule that, like this one, traded flexibility for initial spending (i.e. the more downside flexibility I have, the more more money I can take in the first year).

The rule was just "Take the greater of x% of my current balance or an inflated y% of my initial balance". I remember x=6 and y=3 were reasonable for 95% and 30 years.

The advantage of describing the rule that way is that I know that in my testing, any "success" scenario had spending of at least my floor in every year.
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Old 07-21-2013, 03:02 PM   #35
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Also http://schulmerichandassoc.homestead...l_Profiles.pdf

Guyton's original paper was obtuse and the allocation/trading part was incomprehensible, IMHO. But when Klinger came along and changed the focus to withdrawals, it all made sense.

A cool (?) part is that you can arguably bump up the SWR to 5% and still be safe. What saves you is the pre-defined, automatic reductions of withdrawals when the portfolio gets whacked by a bear.

The reason that the standard SWR is 4% is that there is no automatic mechanism for cutting back in bad times.
Thank you! You're right, this paper is easier to read, and presents the concepts in a very logical order, while reaching very actionable conclusions.

This is EXACTLY what I was looking for. Not only starting around 5% is indeed attractive, but the auto-adjustment baked in the process should make it very future-proof. No more doom-saying baked in the equation. No more fear of market timing. No more implicit assumption that the future will be somewhat akin to the past, except in choosing the starting point, but then it will auto-correct as needs be. If the future is grim, your withdrawals will be too, but this is fair game I guess. Same thing with a rosy future, which is very cool. Or with a grim/rosy/grim/rosy future. Etc.

(Mr Independent, you'll also find the answers to your questions, btw)

Now something nags me... Maybe it's just my perception, but it seems that this general model is NOT widely publicized and used. Why would that be? This does seem close to the Holy Grail...
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Old 07-21-2013, 04:05 PM   #36
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Now something nags me... Maybe it's just my perception, but it seems that this general model is NOT widely publicized and used. Why would that be? This does seem close to the Holy Grail...
Can you imagine a Financial Advisor trying to explain the Guyton-Klinger withdrawal rules to a typical client? Yeah, me neither.

Nor can I see the typical FA just doing the details himself and then telling the client each year how much to withdraw that year. I personally had a little experience at this once -- I mentioned to my in-laws that they should let their dividends automatically reinvest instead of spending the dividends. Wow!!! She accused me of trying to take food out of her mouth and put them in the poorhouse.

When you're trying to make a living (as a FA), it's better to stay conventional and simple -- which means tell your clients to take constant 4% or less.
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Old 07-21-2013, 04:06 PM   #37
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The danger is for anyone about to retire we are in uncharted waters.
We are always in uncharted waters.

Otherwise things would be that much easier to plan.
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Old 07-21-2013, 04:16 PM   #38
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Going into the boondocks in an RV would involve an increase over my current expenses - but I still want to do it
Oh man, I've read about your low rent and living expenses. Forget about RV'ing!

RV'ing is supposed to be cheap, but if you want to move about, gas cost is high. And when your vehicle breaks down, it hurts like the Dickens in the pocketbook.

You should stay put, my friend. It's better to live vicariously through the blogs of the other guys. Or wait till you get SS, and indulge yourself then.
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Old 07-21-2013, 04:32 PM   #39
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I wonder if any models of any financial experts 30 years ago accurately predicted SWR 30 years into the future. I doubt there were no more percent that got it right beyond the odds of getting it right through random chance.
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Old 07-21-2013, 05:36 PM   #40
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I wonder if any models of any financial experts 30 years ago accurately predicted SWR 30 years into the future. I doubt there were no more percent that got it right beyond the odds of getting it right through random chance.
Were they even predicting this stuff 30yrs ago? I thought Bengen was an original in all this in the 90s, but not sure. But then again Bengen etc., was not making a prediction, just stating a fact of history.

Question for those in the know: in the Bengen et al studies, do they choose judiciously from where they take the 4% each year? E.g., take it out of the bonds not the stocks if the stocks had a bad year. I think that would make a difference. Also, many of us would have a few years of cash to buffer against a bear, so would that affect the Bengen calculation? Just wondering if anyone had given these studies that kind of thought ?

Thanx

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