Early Retirement & Financial Independence Community - View Single Post

ESRBob · 01-17-2007, 09:22 PM

Rich,
I think you're right. You could probably reset in 5 years, but you can't cherry-pick the good years since those years of under-withdrawing are needed to support the inflation-adjusting in the bad years, too, as I understand the model.

By switching to the 'withdraw a percent of portfolio value each year' approach, you're essentially resetting every year, and in exchange letting the inflation-adjustment piece go away. I just was never comfortable with the machinery of that set-and-inflate method, or with the previous poster's valid question about resetting yourself to Year 1 after a good year etc. That is what led me to this other approach, which, btw, is generally used by foundations making grants who want to keep making them in perpetuity (which is where the theoretical and empirical foundations for the approach come from). Turns out the annual re-setting of distributions does very good things for portfolio survivability, too (measured in terms of real portfolio value). Soften the downturns with a low-volatility portfolio, some part-time income and the 95% Rule and you've got something which should work well for ERs over the several-decade time frames we need these things to work for.

The other nice thing about this approach is, should you want or need to spend additional sums one year, just do it. The next year, your new safe withdrawal is just 4% +/- of that new lower portfolio value. You don't have to worry about stashing the money aside, pretending you didn't really spend it, paying it back to the portfolio or anything. It's very easy and straightforward to cheat and forgive -- you aren't borrowing from the future or endangering your model, since the model is fresh every year with a new safe withdrawal amount based on a new portfolio value, and a historically supported promise of sustaining that in real terms into the future (since we all need to know we can count on these withdrawals going forward to support a target lifestyle).

In that way it's both flexible and self-policing, which somehow appeals to me.

01-17-2007, 09:22 PM	#37
ESRBob Thinks s/he gets paid by the post Join Date: Mar 2004 Posts: 1,318	Re: Greater than 4% Withdrawal Rate Rich, I think you're right. You could probably reset in 5 years, but you can't cherry-pick the good years since those years of under-withdrawing are needed to support the inflation-adjusting in the bad years, too, as I understand the model. By switching to the 'withdraw a percent of portfolio value each year' approach, you're essentially resetting every year, and in exchange letting the inflation-adjustment piece go away. I just was never comfortable with the machinery of that set-and-inflate method, or with the previous poster's valid question about resetting yourself to Year 1 after a good year etc. That is what led me to this other approach, which, btw, is generally used by foundations making grants who want to keep making them in perpetuity (which is where the theoretical and empirical foundations for the approach come from). Turns out the annual re-setting of distributions does very good things for portfolio survivability, too (measured in terms of real portfolio value). Soften the downturns with a low-volatility portfolio, some part-time income and the 95% Rule and you've got something which should work well for ERs over the several-decade time frames we need these things to work for. The other nice thing about this approach is, should you want or need to spend additional sums one year, just do it. The next year, your new safe withdrawal is just 4% +/- of that new lower portfolio value. You don't have to worry about stashing the money aside, pretending you didn't really spend it, paying it back to the portfolio or anything. It's very easy and straightforward to cheat and forgive -- you aren't borrowing from the future or endangering your model, since the model is fresh every year with a new safe withdrawal amount based on a new portfolio value, and a historically supported promise of sustaining that in real terms into the future (since we all need to know we can count on these withdrawals going forward to support a target lifestyle). In that way it's both flexible and self-policing, which somehow appeals to me. __________________ ER for 10 years; living off 4.3% of savings (and a few book royalties ;-)