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withdrawal plan "layer cake"
Old 10-11-2006, 02:45 PM   #1
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withdrawal plan "layer cake"

I just read an interesting article in the Journal of Financial Planning
there's lotsa good stuff there, and kinda amazing the archives are available
free. Apologies if this has been discussed already, but a quick search of
old topics didn't seem to indicate that it was.

It's basic a scheme for determing SWR based on a basic level and then several

The basic SWR of 4.15% makes typical assumptions - you want to withdraw
a fixed initial fraction and that dollar amt grows with inflation (not adaptive to
portfolio performance), time horizon is 30yrs, rebalancing is done annually,
and the portfolio is almost a "couch potato" of 60% LC stock and 40% inter-
mediate gov't bonds.

You then proceed to adjust this amount up/down as follows:

+0.27% for a more diversified stock allocation (small caps etc)
+0.58% for a lower success rate (based on historical back-testing)
of 95% instead of 100%
+0.10% if rebalancing is done every 4yrs instead of every year (kinda
counter-intuitive, I think the idea is that stock allocation is
effectively increased by not rebalancing as often)
-0.18% if a $100,000 inheritance is desired (I believe this is based
on a $1million initial nestegg
-0.2% if time horizon is 40yrs (instead of 30yrs)

And that's about it. The article has lots of gratuitous graphs and "layer cake"
drawings and such, of course. It also doesn't seem to say how these numbers
were actually computed, although just about everything (except the rebalancing
frequency) could be modeled in FIRECalc (although a quick run of FIRECalc only
supports a success rate of 91% with 4.15% WR and the other "basic" assumptions).


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Re: withdrawal plan "layer cake"
Old 10-11-2006, 02:48 PM   #2
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Re: withdrawal plan "layer cake"

If you dig around, we had a thread a little while ago where various people pretty much tore apart that article.

FWIW< the stuff in the JFP is interesting, but sometimes the articles are not up to the quality of a real academic journal.

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Re: withdrawal plan "layer cake"
Old 10-11-2006, 04:46 PM   #3
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Re: withdrawal plan "layer cake"

Originally Posted by brewer12345
FWIW< the stuff in the JFP is interesting, but sometimes the articles are not up to the quality of a real academic journal.
I agree completely with brewer on this.

There's enough interesting stuff in there to make it worth a read each month, but they intermix articles that are produced by serious academics with articles produced by "joe" the financial planner guy with a new gimmick system.

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Re: withdrawal plan "layer cake"
Old 10-11-2006, 05:24 PM   #4
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Re: withdrawal plan "layer cake"

I wouldn't dismiss the research out of hand.

After all, being able to sling around numbers like 4.15%, +0.27%, +0.58%, +0.10%, -0.18%, and -0.2% indicates that these guys really worked hard to have such extreme confidence in their precision!

And here I am winging it on the left-hand side of the decimal point. I feel so inadequate-- so poorly defined.

Why, I bet they all use this system in their personal portfolios and have already ER'd. No way would they need to publicize the research for their own edification, since they already have more than enough assets to do whatever they want instead of plugging statistical analyses into a 32-bit calculator.



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Re: withdrawal plan "layer cake"
Old 10-11-2006, 05:58 PM   #5
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Re: withdrawal plan "layer cake"

I like reading the JFP articles. I agree that the concept of "peer review" has not entered into the mix. I particuarly liked a Dec 01 article that showed that buying an immediate annuity improved the SWR and survivability of a portfolio. They used a higher annuity yield then anyone could have gotten in 01 and bought it for a plan that extended well past the mortality tables for the "owner." The article never addressed the "longevity insurance" aspect of what they did or the lower residual portfolio.
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