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Old 07-21-2013, 05:43 PM   #41
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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...
One problem I would have with this study is the assumption they make regarding stock, bond and cash returns. They may be right or they may be a tad optimistic

"Stocks are represented by the total returns of the S&P 500, with a lognormal return relative mean of 9.62 percent and a standard deviation of 19.5 percent. For bonds, total returns of long-term Treasuries are used and the values are 4.99 percent and 6.96 percent. Three-month T-bills are the basis for cash returns and the values are 3.74 percent and 2.98 percent".

Just getting to 3.74 in treasuries again would be nice.
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Old 07-21-2013, 05:46 PM   #42
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We are always in uncharted waters.

Otherwise things would be that much easier to plan.
It would be so much easier for me to plan my retirement if I just knew when I was going to kick the bucket (without my own interference)
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Old 07-21-2013, 05:48 PM   #43
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It would be so much easier for me to plan my retirement if I just knew when I was going to kick the bucket (without my own interference)
Not to start an annuity discussion, but I remember reading that the greatest advantage of annuities was that they take that question out of the retirement equation.
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Old 07-21-2013, 05:51 PM   #44
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One problem I would have with this study is the assumption they make regarding stock, bond and cash returns. They may be right or they may be a tad optimistic

"Stocks are represented by the total returns of the S&P 500, with a lognormal return relative mean of 9.62 percent and a standard deviation of 19.5 percent. For bonds, total returns of long-term Treasuries are used and the values are 4.99 percent and 6.96 percent. Three-month T-bills are the basis for cash returns and the values are 3.74 percent and 2.98 percent".

Just getting to 3.74 in treasuries again would be nice.
I'd like to be able to rerun the simulations in that paper using Wade Pfaus lower projected stock and bond numbers to see would we get back to 4% ?
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Old 07-21-2013, 06:03 PM   #45
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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 ?
Guyton/Klinger assumed an annual rebalancing. And this includes the money being withdrawn (view it as reverse rebalancing if you wish, sell first what's high compared to your asset allocation). I think they included a side comment that this was a good thing to do, but didn't change the needle very much.

Can't remember what assumption Bengen made, but this was documented in his original study. Something very simple.

As the pile of cash, well, you should view it as part of your capital, it's just one especially liquid asset category.
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Old 07-21-2013, 06:14 PM   #46
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One problem I would have with this study is the assumption they make regarding stock, bond and cash returns. They may be right or they may be a tad optimistic

"Stocks are represented by the total returns of the S&P 500, with a lognormal return relative mean of 9.62 percent and a standard deviation of 19.5 percent. For bonds, total returns of long-term Treasuries are used and the values are 4.99 percent and 6.96 percent. Three-month T-bills are the basis for cash returns and the values are 3.74 percent and 2.98 percent".

Just getting to 3.74 in treasuries again would be nice.
As far as I understand, they used the most factual data available... the past returns! Whether this is optimistic or pessimistic is crystal-ball reading. Up to each of us to add their layer of caution about the future.

Now, if the withdrawal rate you choose at the beginning was a bit off, the beauty of the model is that it should get back in line based on recent events (i.e. how the market behaves as time goes by). Which is NOT at all the case with those 4% (or 3% or whatever) hard-wired models.

So I guess that if you perceive that the future market returns will be lower than in the past, then yeah, their 5.3% suggestion should be revisited downward. Personally, I started to plug 5% in my own models, with better peace of mind than my previous 4.5% assumption, as it will correct itself if I follow their rules.

Of course, the question would then become... will the auto-correcting withdrawal rate satisfy your needs...
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Old 07-21-2013, 06:19 PM   #47
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I'd like to be able to rerun the simulations in that paper using Wade Pfaus lower projected stock and bond numbers to see would we get back to 4% ?
Would be great indeed. Does anybody know if there is an online tool of sorts allowing to rerun those simulations?

Maybe we should request to the Firecalc experts to include this Guyton/Klinger rule model in the spending model tab... This would be cool.
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Old 07-22-2013, 05:00 AM   #48
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Would be great indeed. Does anybody know if there is an online tool of sorts allowing to rerun those simulations?

Maybe we should request to the Firecalc experts to include this Guyton/Klinger rule model in the spending model tab... This would be cool.
FireCalc already models this pretty closely with the "work Less, Live More" rule in the spending tab. You can adjust the % of subsequent year's spending with this tab. It's not exactly Guyton/Klinger but, it's probably close.
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Old 07-22-2013, 05:06 AM   #49
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FireCalc already models this pretty closely with the "work Less, Live More" rule in the spending tab. You can adjust the % of subsequent year's spending with this tab. It's not exactly Guyton/Klinger but, it's probably close.
Yes, I know, but still quite different... To the point that a 5% WR is acceptable for one model, and only 4% is acceptable for the other, if the academical guys got it right...
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Old 07-22-2013, 01:26 PM   #50
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Klingers website

Klinger has a website (do you trust a guy called Klinger?

Publications

And he sells the simulator for 50 bucks.
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Old 07-22-2013, 02:34 PM   #51
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T

(Mr Independent, you'll also find the answers to your questions, btw)
I looked at the paper, but didn't find the answers to my questions.

The typical 4% SWR assumes that I will take $40k in the first year and increase it by the CPI every year, even if investment returns are very poor. Typical models and assumptions might show that I have a 5% chance of running out of money if I live 30 years.

This one says that if I have some downside flexibility, I can start at 5% or $50k. But, how much flexibility do I need? Suppose I think my basic needs are $20k, can I "safely" take $50k in the first year and apply these rules, knowing that they will never require that I live on less than $20k? What if my basic needs are $30k, can I still start at $50k? What if I can't live on less than $40k, ... oops, I know the answer to that one, I can't safely start at $50k.

These Monte Carlo models are generating the answers in their calculations, I don't see the author reporting them.
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Old 07-22-2013, 04:09 PM   #52
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I looked at the paper, but didn't find the answers to my questions.
Ah yes, you're right. I had noticed that the comments associated with Figure 3 do describe the lowest withdrawals that might happen. But didn't pay attention that the (more interesting) following figures do not have similar comments.

Personally, I am not overly fazed, as tough times would demand tough measures (work again, gasp! possibly part-time), but I'm with you, I'd love to see more details.

Well, either one of us buys the simulator from Mr Klinger, or we can convince the Firecalc fellows to beef up the spending model tab (and underlying math)! Which would be very cool, but of course, it's easy to say.

PS. check Mr Klinger's Web site, there is more data in there. Thanks for the pointer, bmcgonig.
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Old 07-22-2013, 07:07 PM   #53
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I read the paper and it just seemed to confirm with analysis what many of us have been saying - if one has a high withdrawal rate that you need to have some flexibility to reduce withdrawals if returns are poor and you may be able to increase withdrawals if returns are good. This is similar to the authors' capital preservation and prosperity rules.

Actually, I think the authors would say that if you can live on $40k you could probably start at $50k since you could absorb up to two 10% cuts under the capital preservation rule and still have enough to live on.
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Old 07-23-2013, 09:14 AM   #54
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I read the paper and it just seemed to confirm with analysis what many of us have been saying - if one has a high withdrawal rate that you need to have some flexibility to reduce withdrawals if returns are poor and you may be able to increase withdrawals if returns are good. This is similar to the authors' capital preservation and prosperity rules.

Actually, I think the authors would say that if you can live on $40k you could probably start at $50k since you could absorb up to two 10% cuts under the capital preservation rule and still have enough to live on.
Suppose I have a model and a set of assumptions that say a constant real $40k withdrawal will fail in 5% of the 30 year scenarios.

I'm pretty sure that if I start with $50k, use the authors rules, but put a floor of $40k on my withdrawals, than I will fail more than 5% of the time.

I don't see the free lunch.
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Old 07-23-2013, 09:22 AM   #55
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Ah yes, you're right. I had noticed that the comments associated with Figure 3 do describe the lowest withdrawals that might happen. But didn't pay attention that the (more interesting) following figures do not have similar comments.

Personally, I am not overly fazed, as tough times would demand tough measures (work again, gasp! possibly part-time), but I'm with you, I'd love to see more details.

Well, either one of us buys the simulator from Mr Klinger, or we can convince the Firecalc fellows to beef up the spending model tab (and underlying math)! Which would be very cool, but of course, it's easy to say.

PS. check Mr Klinger's Web site, there is more data in there. Thanks for the pointer, bmcgonig.
If you're good with Excel, I think you can duplicate FireCalc for a little testing with an Excel spreadsheet. The key is that FireCalc gives you the option of downloading a detailed sample calculation, and you can back out the formulas, extract the assumptions, and change the spending rule.
(I tried this some years ago and I think I was fairly successful.) Of course, then we get into the "easy" issue
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Old 07-23-2013, 09:47 AM   #56
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I'm going to try to hang on to my 2.75-3% rate for now. If Mr Market performs really well over the next 10 years, I might buy a toy or two here and there...like a diesel pusher RV, which would throw the percentage way out of whack for a year or so. I like the idea of not having to worry about having money when I need it, and I am pretty confident that we will be quite happy with our ability to spend at that WR. That said, this year is a bit of a nightmare, as we are doing a lot of repairs and fixits on our home that we left vacant for the past 8years while on assignment overseas. The compensated non-compete is taking care of that. Next year, we won't have those expenses, for the most part, and spending will be way down.

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Old 07-23-2013, 11:06 AM   #57
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If you're good with Excel, I think you can duplicate FireCalc for a little testing with an Excel spreadsheet. The key is that FireCalc gives you the option of downloading a detailed sample calculation, and you can back out the formulas, extract the assumptions, and change the spending rule.
(I tried this some years ago and I think I was fairly successful.) Of course, then we get into the "easy" issue
While it's not automatic, I finally got around to creating some runs to take a stab at this. I started with that 1973 output, and you see (and it can be seen on the graphs, kinda, if you squint), that the portfolio takes a major hit in the first few years, and that's is hard to recover from.

So here's what I got (maybe this should be a separate thread?):
I first found that you can hit 100% success with a straight $35,947/$1,000,000 spend/portfolio (so 3.595% WR).

Since that drop hits early, I modeled starting at $40K/$1M (4%), cutting to $20K (2%) in 2015. Through trial/error found I needed to do this for so 6 years just to get back to 100%. I 'undid' the spending cut by adding it back as pension in year 2021.

FIRECalc: 4% - 2% - 4%

40K/1M, rest are defaults, then;

$20,0000 income Infl Adjusted start 2015 (effectively cuts spending in half)

$20,0000 spending Infl Adjusted start 2021 (effectively returns spend to original)

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try similar, start at 5%, cut in half, return to 4%

FIRECalc: 5% - 2.5% - 4%

Start at 5%, cut to 2.5% in 2015, hold thru 2024 (ten years inclusive), then return to 4% of initial. Took 10 years to hit 100% success.

50K/1M defaults;

$25,0000 income Infl Adjusted start 2015 (effectively cuts spending in half to $25,000)

$15,0000 spending Infl Adjusted start 2024 (effectively returns spend to $40K - 4%)

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Using Investigate - for 100% straight, 3.59% spending through-out.

So let's SS this and see what the total spend (in buying power) would be summing all 30 years:


Code:
Straight 3.5947%                 : $1,078,410	

Adjust 4% - 2% (6 years) - 4%    : $1,080,000	100.15%	

Adjust 5% - 2.5% (10 years) - 4% : $1,130,000	104.78%
To each their own, but I would not care to make a long term cut like that in my early years. And the long-term benefit is pretty small. Others might want to play with cuts at different points, and see what they get. I also did not attempt to find the low point in the portfolio in each case. I suspect that even with these drastic cuts, one would see a drastically reduced portfolio.

OK, here's one - FIRECalc: 5% init, adj - 5 years - that takes the 5% initial and shortens to 5 years to give that ending portfolio value - it's down to less than half - $461,564/$1,000,000 - a 54% dip!

Oh, what the heck, for the others 4% - 2% -4% - FIRECalc: 4% init, adjust - 5 years

$491,291/$1,000,000 - a 51% dip.

and straight 3.5947% - FIRECalc: 3.5947% NO adjust - 5 years

$448,935 - a little worse actually, but all in the same scary neighborhood.

So when people say they would obviously cut their spending if their portfolio tanked, would they really cut it in half, for 6 years, in their prime retirement years?

Or something else? Please share any scenario that gets you to 100% - maybe it can be done with better times or more shallow cuts to spending. But then we may be getting close to data-mining - what would a generalized rule set be?


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FireCalc already models this pretty closely with the "work Less, Live More" rule in the spending tab. You can adjust the % of subsequent year's spending with this tab. It's not exactly Guyton/Klinger but, it's probably close.
The problem I have with that is when the portfolio grows, you spend that much more, regardless of inflation. I think most people spend based on a combo of needs and resources, and don't just spend because they have it. They probably never would have attained FIRE status if they did that.

-ERD50
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Old 07-23-2013, 07:54 PM   #58
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Thanks, lots of good work there. I hadn't thought about that approach.

I'm going to paraphrase and see if I have this right. If I have a $1 million portfolio, a traditional level $$ SWR lets me spend $36k every year.

If I want to move the early years up to $40k, I need to be willing to cut to $20k for 6 years in some scenarios just to make up my extra early withdrawals.

If I want to move the early years up to $50k, I need to be willing to cut to $25k for 10 years in some scenarios to make up for the early withdrawals.

Of course, $20k and $25k are significantly below the level $36k.
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Old 07-23-2013, 08:47 PM   #59
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Thanks, lots of good work there. I hadn't thought about that approach.

I'm going to paraphrase and see if I have this right. If I have a $1 million portfolio, a traditional level $$ SWR lets me spend $36k every year.

If I want to move the early years up to $40k, I need to be willing to cut to $20k for 6 years in some scenarios just to make up my extra early withdrawals.

If I want to move the early years up to $50k, I need to be willing to cut to $25k for 10 years in some scenarios to make up for the early withdrawals.

Of course, $20k and $25k are significantly below the level $36k.
This is not how I understand these papers. If you start taking $50000 and adjust for inflation, if the value of the portfolio drops by some you either don't take the inflation adjustment that year and if it drops by 20% or more you would cut by 10% or in the case of $50,000 down to $45,000. That $45,000 becomes your new base to adjust from Say the following year you lost another 20%- then you would cut $45000 down to $40,500 or by 10%. This is now the base. If the portfolio does not lose from there, you increase $40,500 by an inflation amount. And if you have a big gain in the portfolio, you could increase by 10% of that $40,500 base. I do not know where or why one would need to drop down to 2%WR according to these dynamic WR strategies.
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Old 07-23-2013, 09:12 PM   #60
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This is not how I understand these papers. If you start taking $50000 and adjust for inflation, if the value of the portfolio drops by some you either don't take the inflation adjustment that year and if it drops by 20% or more you would cut by 10% or in the case of $50,000 down to $45,000. That $45,000 becomes your new base to adjust from Say the following year you lost another 20%- then you would cut $45000 down to $40,500 or by 10%. This is now the base. If the portfolio does not lose from there, you increase $40,500 by an inflation amount. And if you have a big gain in the portfolio, you could increase by 10% of that $40,500 base. I do not know where or why one would need to drop down to 2%WR according to these dynamic WR strategies.
This is my understanding as well. I also seem to remember that, based on the research, only two such 10% spending reductions were required during a 30 (40?) year period.

I could live with that.
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