Interesting analysis of SWR backup plans

[jabbahop]

Interesting and detailed look at spending reduction options on worst case historical sequences.

Interesting that short term belt tightening is not effective as I had assumed.

https://earlyretirementnow.com/2018...l-rates-part-24-flexibility-myths-vs-reality/

 

[marko]

I did not read the whole article but found the first chart interesting.

The chart says: "What a different the small increase in the initial net worth makes. Increasing the initial net worth by 14.5-22.6% will roughly double the lifespan of the retirement portfolio!"

But it wasn't the size of the NW that made the difference is was that the $40K WR in both scenarios was 3.2% of the NW vs 4% WR that saved the day.

Success was not had by working a bit longer and increasing the portfolio, it was by reducing the WR. Looking at it from the other end, I suspect that if the WR was 3.2% on the 1MM it would be equally successful.

 

[rodi]

It is an interesting article. The biggest flaw I see with the starting premise is that he assumes a 4% withdrawal rate on a 50 year retirement. AFAIK the studies that looked at 4% assumed a 30 year retirement.

His solution of being flexible by working a few extra years could also be translated as using a smaller percentage withdrawal. One of the reasons I started with closer to 3% withdrawal.

 

[marko]

rodi, it looks like I beat you to the same conclusion by one minute!

 

[ERD50]

Good article, thanks for posting. I've addressed this in the past. People would say "Well, if we have a serious downturn, I'll just cut spending a bit, who wouldn't?" - as if it were that simple. It's not.

A simple summary of that article to consider: The kind of downturn that results in failures is a ~ 50% reduction in the early years. Now does it really make sense that cutting spending from say 4% to 2% for a few years is going to have much effect compared to that 50% dip?

I've actually modeled that in FIRECalc, the results are probably in some earlier threads, but it was clear it took a long and severe cut in spending to be able to pull a failure to success.

The second problem is what if he have a deep dip, but a quick recovery like in 2008? Do you cut right away for a few years, and miss out on what could be once-in-a-lifetime opportunities, just to find your portfolio recovered just fine, and you can never get that opportunity back again? And if you wait a few years, will it be too late?

Yes, "I'll just cut back" is a gross oversimplification, with serious quality-of-life issues, and not likely to be effective.

-ERD50

 

[ERD50]

It is an interesting article. The biggest flaw I see with the starting premise is that he assumes a 4% withdrawal rate on a 50 year retirement. AFAIK the studies that looked at 4% assumed a 30 year retirement.

His solution of being flexible by working a few extra years could also be translated as using a smaller percentage withdrawal. One of the reasons I started with closer to 3% withdrawal.

(and related posts) - Sure, if you start with a 'historically safe' WR, there are no failures, so no need to cut back to avoid failure! In that case, there's nothing to write about.

This is more geared towards the posters (and I've seen quite a few), who would rather start with (for example) a 4% ~ 6% WR and with the idea of being 'flexible', versus a safer 3% WR. Many of them sort of considered the 3% group to be 'suckers', that the odds are they could spend the 4% and never run into trouble.

And that's true, in fact I think you can be historically safe ~ 50% of the time with something like 6-7% WR. So 3% can be considered overly-conservative in some ways.

But their thinking that cutting back for a few years is going to save them is misguided, as this article, and my own studies have shown.

-ERD50

 

[ERD50]

Here's the thread I started regarding the deep dips that were historically seen even in portfolios that succeeded. Later in that thread, I mention modeling the cutbacks to soften those dips, but have not found that thread yet.

http://www.early-retirement.org/for...t-worth-anyone-scared-32866-2.html#post606756

Kinda interesting to see that was posted right before the big 2008-2009 dip!

-ERD50

 

[marko]

Good article, thanks for posting. I've addressed this in the past. People would say "Well, if we have a serious downturn, I'll just cut spending a bit, who wouldn't?" - as if it were that simple. It's not.

A simple summary of that article to consider: The kind of downturn that results in failures is a ~ 50% reduction in the early years. Now does it really make sense that cutting spending from say 4% to 2% for a few years is going to have much effect compared to that 50% dip?

I've actually modeled that in FIRECalc, the results are probably in some earlier threads, but it was clear it took a long and severe cut in spending to be able to pull a failure to success.

The second problem is what if he have a deep dip, but a quick recovery like in 2008? Do you cut right away for a few years, and miss out on what could be once-in-a-lifetime opportunities, just to find your portfolio recovered just fine, and you can never get that opportunity back again? And if you wait a few years, will it be too late?

Yes, "I'll just cut back" is a gross oversimplification, with serious quality-of-life issues, and not likely to be effective.

-ERD50

Fascinating isn't it? That darned future is so unpredictable! And waaay too many variables.

In the end it seems that despite all the analysis, calculations and planning the best most folks can hope to do is just jump and make it up along the way.

Once again, "It depends" seems to be the mantra but you never know until you look back on it.

 

[ERD50]

Fascinating isn't it? That darned future is so unpredictable! And waaay too many variables.

In the end it seems that despite all the analysis, calculations and planning the best most folks can hope to do is just jump and make it up along the way.

Once again, "It depends" seems to be the mantra but you never know until you look back on it.

Yes, the future is unpredictable, but that doesn't mean we can't learn from what did happen in the past.

So sure, we don't know if our portfolios will see a 50% dip in our future, but we can look to the past and see what we could do to cope with a 50% dip, which might help us prepare. We can see what worked and what didn't. And while those conditions won't repeat exactly, it at least provides a sort of baseline. Imperfect, but better than just words ("I'll just cut back and be fine") w/o any backing at all.

-ERD50

 

[garyt]

I find calling a 14-22.5% increase in net worth a SMALL increase laughable.

 

[Dtail]

Good article, thanks for posting. I've addressed this in the past. People would say "Well, if we have a serious downturn, I'll just cut spending a bit, who wouldn't?" - as if it were that simple. It's not.

A simple summary of that article to consider: The kind of downturn that results in failures is a ~ 50% reduction in the early years. Now does it really make sense that cutting spending from say 4% to 2% for a few years is going to have much effect compared to that 50% dip?

I've actually modeled that in FIRECalc, the results are probably in some earlier threads, but it was clear it took a long and severe cut in spending to be able to pull a failure to success.

The second problem is what if he have a deep dip, but a quick recovery like in 2008? Do you cut right away for a few years, and miss out on what could be once-in-a-lifetime opportunities, just to find your portfolio recovered just fine, and you can never get that opportunity back again? And if you wait a few years, will it be too late?

Yes, "I'll just cut back" is a gross oversimplification, with serious quality-of-life issues, and not likely to be effective.

-ERD50

That is why I will be using 3% of portfolio balance in the early years. If there is a 50% drop with my 50% stock portfolio, my 3% WR goes to 4% with no cutting of expenses.
My budget is not padded like some others and I would need to severely cut back on travel and entertainment exp.
Where does that leave me; reading this ER site 100% of the time? lol

 

[Hermit]

That is why I will be using 3% of portfolio balance in the early years. If there is a 50% drop with my 50% stock portfolio, my 3% WR goes to 4% with no cutting of expenses.
My budget is not padded like some others and I would need to severely cut back on travel and entertainment exp.
Where does that leave me; reading this ER site 100% of the time? lol

That seems to be about all I do now, so that would not be so bad for me!

 

[mrWinter]

I thought the article was interesting but a big takeaway for me that the author didn't really point out was how very helpful/important using CAPE evaluation can be. He pointed out that using a Variable CAPE withdrawal strategy, in the 1929 scenario the retiree would only be able to withdrawal 30k at the get go, rather than 40k. RIGHT, and that's a huge deal, they'd be able to see right out of the gate that they don't actually have as much value in the market as they might think, it's just a huge P/E increase with little actual value behind it, so even though their portfolio has hit their 'magic number' they aren't actually ready to FIRE. The author kind of suggested this was a downside of that method, for the first decade you had to eat a 25% decrease in withdrawals, but that's not a downside, it's a huge upside, you got to know ahead of time that you can't actually pull out 40k. So you shouldn't really be comparing the 30k withdrawal method in that scenario to the 40k you wanted to withdrawal, you should really be comparing whatever haircut you take down the line compared to your starting withdrawal , whatever it was. In that light the possible belt-tightening looks more reasonable.

 

[haha]

That is why I will be using 3% of portfolio balance in the early years. If there is a 50% drop with my 50% stock portfolio, my 3% WR goes to 4% with no cutting of expenses.
My budget is not padded like some others and I would need to severely cut back on travel and entertainment exp.
Where does that leave me; reading this ER site 100% of the time? lol

Surely what is interesting about your life is more than travel and entertainment?

 

[Dtail]

Surely what is interesting about your life is more than travel and entertainment?

Of course, but in terms of discretionary spending related to WR% reduction, that is mostly the reference. The free interesting stuff to do will of course remain, but some stuff which costs bucks just can't do as easily past a certain age.

 

[audreyh1]

Definitely during steep downturns the market drops and inflation will overwhelm any small reduction in withdrawal rate.