4% rule failures?

[haha]

How would you advise each of them?

"Please consult your financial advisor, legal team, accountant and/or astrologer."

Ha

 

[BigNick]

My guess is that once a portfolio that is one's only or main source of support hits $375,000, life changes, and likely forever.

I agree, in two ways:
- The one which I think you meant
- The other one, which is that if you get down to 375K and you're happy that that's enough, you've either gone lala, or you know with some certainty that you aren't going to be around long enough to run out.

In any of those cases, yep, things have changed and they ain't coming back the way they were.

 

[ERD50]

Nope, not saying that. But let me ask you this ... Take two people, A & B. Both are the same age. Both have same budget. Both have same portfolio. Only difference is A retired five years ago and is doing a gut check to see how things are looking, and B is contemplating retirement now. Both of them see the same thing, that it does not look so hot, 2% SWR advised per whatever tool of choice. How would you advise each of them?

I'll do one better - here's a story of THREE people

http://www.early-retirement.org/forums/f28/three-brothers-53151.html#post1000663

You'll need to go to the beginning to catch it all.

-ERD50

 

[tryan]

Raddr has been running a long-term thread on his board about the hapless Y2K ER who refuses to reduce his spending to reflect reality.

Has anyone looked at the hapless 2008 retiree?

 

[Arnie]

I'll do one better - here's a story of THREE people

Thanks ERD50. I enjoyed that thread when it first appeared and just reread it. The three brothers example tells a totally different story than my A & B example though. It doesn't matter what A & B had years ago. In fact A & B lacks one of the weaknesses observed with the three brothers example - A & B are at a point now where they are both identical in their finances and are trying to decide what shape they are in going forward.

I enjoyed Ha's great answer on how to advise them. But should whoever advises them give the two of them different advice? I think not. A's likelihood of success in a continued retirement is exactly the same as B's in starting retirement, assuming they do everything the same.

It does not matter that A's original calculations supported 4% and that A went through a bad spot and (historically) should recover. Current projections inform both A & B that they are only safe with 2%. If there is any valid argument that A can continue with 4%, then the same argument says B can start with 4%. But I would not be any more comfortable with that than I would with the approach of the "hapless Y2K ER".

By the way, person A should not have waited 5 years to re-evaluate.

If part of the original question, and I may have missed it, was how does one tell when they are getting in trouble - and the answer is not, at least in part, to rerun the numbers through their original tool(s), then I think there is a problem with the tool or, perhaps more likely, the understanding and application thereof.

Again, I was not and am not trying to make this about the excellent FIRECALC. I agree with ERD50's comment that "it isn't correct to say that you can just run FIRECALC again after a bad stretch, and say that that new number is the new 'correct' number." But I cannot get my head around it being any less 'correct' for A vs. B in this example. If there is an issue it is believing that any tool can give you a 'correct' number in the sense of giving you something you can stick blindly to and be bulletproof.

Thanks folks for taking the time with me. I am, after all, confused by dryer sheets. I doubt we're disagreeing much at this point and I may just be going on because I enjoy the sound of my own voice.

-Arnie

 

[haha]

But should whoever advises them give the two of them different advice? I think not. A's likelihood of success in a continued retirement is exactly the same as B's in starting retirement, assuming they do everything the same.

To give you a more serious answer, I agree with your conclusion 100%. Early on I would read the explanations of how the history of one’s getting to the present effects his chances going forward- given same size port, same WR, and same required duration.

I cannot see how it possibly could matter

Because the markets tend to be mean reverting over long periods of time, (as to value ratios, not level) I believe that the market has some sort of memory. Its history does matter, as opposed to the model of it being a Monte Carlo generator. But the market has no idea when you or I dropped in, and would be indifferent to this information if it had it.


Ha

 

[cho oyu]

It does not matter that A's original calculations supported 4% and that A went through a bad spot and (historically) should recover. Current projections inform both A & B that they are only safe with 2%. If there is any valid argument that A can continue with 4%, then the same argument says B can start with 4%. But I would not be any more comfortable with that than I would with the approach of the "hapless Y2K ER".

-Arnie

There's a difference in assumptions in the two scenarios:

Scenario 1: planning for retirement only looking with a forward model(i.e. your person B)

Scenario 2: planning for retirement by including both recent past and modeled future results assuming temporal autocorrelation (your person A); the answers to this simulation are merely a subset of answers to scenario 1

Therefore, scenario 1 is a more robust answer to a monetary survival question.

As to whether it is better? That depends on how well one thinks that the future can be predicted based on the past. Ultimately, which imperfect prediction method allows you to peacefully sleep each night?

 

[FIRE'd@51]

It does not matter that A's original calculations supported 4% and that A went through a bad spot and (historically) should recover. Current projections inform both A & B that they are only safe with 2%. If there is any valid argument that A can continue with 4%, then the same argument says B can start with 4%. But I would not be any more comfortable with that than I would with the approach of the "hapless Y2K ER".

While I see your point, it is inconsistent with a FIRECALC probability prediction because of the 5-year time difference.

At this point A has 25 years to go and B has 30 in terms of measuring the success of a FIRECALC prediction. Certainly FIRECALC would say that A has a higher probably of success for 25 years than B for 30 at the same withdrawal rate. By saying they both now have 30-year horizons, you are implicitly saying that A should have based his initial withdrawal rate on a 35-year time span.

 

[ERD50]

Thanks folks for taking the time with me. I am, after all, confused by dryer sheets. I doubt we're disagreeing much at this point and I may just be going on because I enjoy the sound of my own voice.

-Arnie

Well for me, explaining something helps me to make sure I understand it, so I get something out of it too.

So I see where you are coming from, and I agree that if at a specific point in time, there is no difference between them in their SWR if they have the same portfolio $ and the same # of years going forward (edit - I see FIRE'd@51 touched on this). Consistent with the Three Brother's story, it is how they got there - but we can ignore that for now.

But consider this - FIRECALC doesn't make any assumption of what the past was when you jump in. The failures reported have you starting off at the worst possible time (that's why they fail!). But, if you started with $1M, and 5 years later you have half that, you are already five years into a period of very bad times. FIRECALC is now going to put you back at the beginning of a bad period, rather than having that $1M 5 years in. So it extends your bad streak by 5 years.

So....... in that case, FIRECALC is being over-conservative, and actually BOTH of the people could get by with a higher SWR at that point. They still have $500K after 5 years of bad times. IOW, bad periods are pretty much defined by coming off a high period. But these two people came off a lower period. Yes, statistically they can take a higher SWR than normal with the same success rate.

Now whether you are comfortable with taking that higher rate or not is a personal gamble. But that is (to the best of knowledge) how to interpret what FIRECALC does with that scenario.

-ERD50

 

[Moemg]

.

By the way, person A should not have waited 5 years to re-evaluate.

.

-Arnie

Absolutely ! I retired in 2007 just when the s--t was hitting the fan and had I continued along the 4% plus inflation I would have done serious damage to my portfolio .

 

[Arnie]

Now whether you are comfortable with taking that higher rate or not is a personal gamble. But that is (to the best of knowledge) how to interpret what FIRECALC does with that scenario.

I understand and agree with your FIRECALC explanation. I guess I can blame my lack of comfort with using higher WR's in the A & B example on recency bias. If I was up against that scenario in reality I might want to "average" the FIRECALC results with those from other tools.

 

[FUEGO]

I have thought a lot about this issue over the last couple years. Soon I plan to post a new thread with some recent research I have done. Until then, I'll add to the discussion by linking a previous bit of research I did:

http://www.early-retirement.org/for...-but-i-found-the-secret-to-success-35074.html

In that thread, I presented some research I did. If you want to skip to my conclusions, here they are: Go back to work if at 10 years you have less than 60% of your initial portfolio value or if at 15 years you have less than 50% of your portfolio value. This would greatly reduce your odds of running out of money, but not send you back to work prematurely.

 

[Katsmeow]

Disagree (at least as far as analysis of past data, as FIRECALC does).

We didn't have two Great Depressions in a row. We didn't have two periods of high inflation like the 80's in a row. The market conditions have been cyclical.

So you are saying, "My hypothetical portfolio just barely survived the inflation of the 80's (or the GD), I need enough left over to do it all over again".

If you want enough buffer to provide some assurance that you could survive a future scenario that might be like two past bad periods strung together, then that would be a reasonable approach. But it's assuming the future will be worse than the worst of the past. And it might be reasonable to allow for that kind of buffer.

But it isn't correct to say that you can just run FIRECALC again after a bad stretch, and say that that new number is the new 'correct' number. By that logic, the you are really saying that those squiggly lines you see that dip, and then correct themselves over the long haul do not really exist - that they all ended up failures. But they didn't.




-ERD50

I don't think so. It is sort of like the guy who rolled heads and the question is how likely is it that his next roll would be heads. Some would say not because it is less likely someone will roll two heads than one head and one tail. But they are comparing apples and oranges. When no rolls have been made it is less likely that someone will roll two heads. But once one roll has been made (and been heads) that person still has a 50-50 chance of rolling heads.

So, yes, it is very unlikely someone will have two sets of extremely bad market returns close in proximity. However, if A retires, has the bad market returns, then that has already happened to him. He does not have less likelihood of bad future market returns than B who hasn't retired. A's overall probably of success may be higher because he might have less years of retirement to plan for. But future economic conditions will be the same for both him and B.

 

[ERD50]

I don't think so. It is sort of like the guy who rolled heads and the question is how likely is it that his next roll would be heads. Some would say not because it is less likely someone will roll two heads than one head and one tail. But they are comparing apples and oranges. When no rolls have been made it is less likely that someone will roll two heads. But once one roll has been made (and been heads) that person still has a 50-50 chance of rolling heads.

So, yes, it is very unlikely someone will have two sets of extremely bad market returns close in proximity. However, if A retires, has the bad market returns, then that has already happened to him. He does not have less likelihood of bad future market returns than B who hasn't retired. A's overall probably of success may be higher because he might have less years of retirement to plan for. But future economic conditions will be the same for both him and B.

But FIRECALC isn't MonteCarlo. There is no rolling of dice, it is just reporting on the past scenarios. It has nothing to do with the likelihood of it happening. It either happened or it didn't. If it happened it's considered.

And the fail scenarios you get don't start 5 years into the bad period, that would shorten the bad period by 5 years and that wouldn't be the worst of the worst. And they don't start at the beginning of the second stage of a double-whammy bad market, the worst would be both stacked together (if/when that happens). So for that case, we are now talking about someone surviving a bad market and then throwing two more sequential bad markets on top of that with the FIRECALC failure. That no longer reflects history, and is outside the realm of what FIRECALC does.

And this assumes the future is no worse than the past, but that is all the tool can do. You can adjust for that if you wish (not a bad idea at all), but don't double-adjust w/o considering what it is really telling you.

-ERD50

 

[Nords]

I know Dory had adjusted Firecalc for the large down draft. Does anyone know if it was again adjusted for the large come back in the last year and 1/2?

Dory not only took care of all the "routine" maintenance and bug-fixing and upgrades, as well as educating those who thought a feature was actually a bug, but every year he also downloaded Schiller's databases of asset-class performance. I remember there used to be a lag of months until the previous year's data was available for Dory to download.

Either FIRECalc or E-R.org was a significant commitment, especially for a guy who spent most of his time on the Intracoastal Waterway. Together they amount to nearly a full-time job.

 

[Arnie]

There's a difference in assumptions in the two scenarios:

Scenario 1: planning for retirement only looking with a forward model(i.e. your person B)

Scenario 2: planning for retirement by including both recent past and modeled future results assuming temporal autocorrelation (your person A); the answers to this simulation are merely a subset of answers to scenario 1

Therefore, scenario 1 is a more robust answer to a monetary survival question.

As to whether it is better? That depends on how well one thinks that the future can be predicted based on the past. Ultimately, which imperfect prediction method allows you to peacefully sleep each night?

Why would one assume temporal autocorrelation for A and not for B?

 

[Arnie]

While I see your point, it is inconsistent with a FIRECALC probability prediction because of the 5-year time difference.

At this point A has 25 years to go and B has 30 in terms of measuring the success of a FIRECALC prediction. Certainly FIRECALC would say that A has a higher probably of success for 25 years than B for 30 at the same withdrawal rate. By saying they both now have 30-year horizons, you are implicitly saying that A should have based his initial withdrawal rate on a 35-year time span.

Yes, there is an implicit assumption that A retired earlier, should have (and did) base his initial WR on a longer period. But that was then and this is now. In spite of A getting an earlier start on ER, they have both experienced the same markets over the last 5 years. They are the same age, have the same expenses, portfolio, AA, etc.

 

[haha]

Yes, there is an implicit assumption that A retired earlier, should have (and did) base his initial WR on a longer period. But that was then and this is now. In spite of A getting an earlier start on ER, they have both experienced the same markets over the last 5 years. They are the same age, have the same expenses, portfolio, AA, etc.

This is always good for an argument. But truthfully, it is understood best on a first take before you get confused. Short of some sort of magic attribution, it cannot matter, as I posted above. After a huge crash, another one is somewhat less likely. But just as less likely for a new retiree as for the battle scarred and portfolio damaged veteran. Valuation is what counts, not path.

To give you a more serious answer, I agree with your conclusion 100%. Early on I would read the explanations of how the history of one’s getting to the present effects his chances going forward- given same size port, same WR, and same required duration. But I cannot see how it possibly could matter.

Because the markets tend to be mean reverting over long periods of time, (as to value ratios, not level) I believe that the market has some sort of memory. Its history does matter, as opposed to the model of it being a Monte Carlo generator. But the market has no idea when you or I dropped in, and would be indifferent to this information if it had it.


Ha

 

[Arnie]

This is always good for an argument. But truthfully, it is understood best on a first take before you get confused. Short of some sort of magic attribution, it cannot matter, as I posted above. After a huge crash, another one is somewhat less likely. But just as less likely for a new retiree as for the battle scarred and portfolio damaged veteran. Valuation is what counts, not path.

Yep.

 

[bamsphd]

I like simple plans. However, I don't think it is reasonable to run FIRECALC (or any set of tools) on the day you retire, then plan to blindly adjust your withdrawals by inflation until the day that you and your spouse die. Though running such tools is a reasonable approach for determining your initial withdrawals.

I think it is more reasonable to do roughly the following.

1. Decide what success percentage rate you want.
2. Look up not just your life expectancy (joint if married, a 50% chance number), but rather when you have at least your success percentage odds of being dead. Basically determine your optimistic life expectancy number.
3. Plug your portfolio information and your optimistic life expectancy number into FIRECALC and/or your other tools of choice, and have the tool(s) tell you your safe withdrawal rate at your success percentage.
4. Try to spend at most that much, or try to WORK. However, don't worry too much if during a bear market you spend using a previous year's prediction for a few years.
5. Wait a year.
6. Repeat from step 2. Note that your life expectancy has now probably gone UP, but baring medical breakthroughs it has probably gone up by less than a year.

The main disadvantage of this approach is that you will not have nice constant inflation adjusted withdrawals. The main advantage is that you will have annual course corrections.

If nothing else, just surviving means you need to adjust your life expectancy. For example, according to the SSA tables, a single 50 year old male can expect (50/50) to live another 28.78 years until he is 78.78. So say he naively plugs 29 years into FIRECALC and similar tools and decides to retire. In 29 years, assuming no changes to the life expectancy tables, if he is still alive he can expect to live another 8.29 years. So the new best guess is that his portfolio must now survive about 28% longer than he thought when he was 50. In reality, I would expect the variation in portfolio performance over 29 years to have an even larger affect than the change in his life expectancy. Just because you retire does not mean you should stop thinking and adjusting!

But FIRECALC isn't MonteCarlo. There is no rolling of dice, it is just reporting on the past scenarios. It has nothing to do with the likelihood of it happening. It either happened or it didn't. If it happened it's considered.

And the fail scenarios you get don't start 5 years into the bad period, that would shorten the bad period by 5 years and that wouldn't be the worst of the worst. And they don't start at the beginning of the second stage of a double-whammy bad market, the worst would be both stacked together (if/when that happens). So for that case, we are now talking about someone surviving a bad market and then throwing two more sequential bad markets on top of that with the FIRECALC failure. That no longer reflects history, and is outside the realm of what FIRECALC does.

And this assumes the future is no worse than the past, but that is all the tool can do. You can adjust for that if you wish (not a bad idea at all), but don't double-adjust w/o considering what it is really telling you.

-ERD50

If you do NOT assume the "Great Depression" is the worst scenario we could see, then it could be reasonable to say that the midst of a "Great Recession" might be the start of the "Greatest Depression" instead of a mean reversion back to prosperity. You could even say that being in the midst of a "Great Recession" increases the odds that the near future will be the "Greatest Depression." So rerunning FIRECALC style tools does not seem unreasonable, just depressing, during a "Great Recession."

Given two identical twins with identical portfolios, identical life expectancies, and identical portfolio survival choices, an ideal tool should spit out the same withdrawal rate guess. However, under the rules of statistics, it is possible to pose the question in such a way (eg one retired earlier) that the statistical answer is different. I just don't think that is generally a useful thing to do.

 

[youbet]

Interesting approach bamsphd, but not for me. Pre-FIRE DW and I studied our spending and estimated how that would change in retirement and how we would meet other goals such as self-insuring for LTC, providing for a special needs grandchild and other things. Then we calculated how much retirement resource we'd need to give us the necessary income with a conservative WR to meet that spending level. We did not, as you are doing, simply retire and then calculate how much we could withdraw from whatever we had.

IMO, you're making a mistake not considering how much you want/need to spend but rather simply testing for a WR that would survive given what you have and then assuming you'll somehow survive on that spending level. You really should consider how much you want/need to spend.

Edit: Oh yeah..... the Great Depression was not the toughest period in US economic history for retirement portfolios to survive....

 

[bamsphd]

Pre-FIRE DW and I studied our spending and estimated how that would change in retirement and how we would meet other goals such as self-insuring for LTC, providing for a special needs grandchild and other things. Then we calculated how much retirement resource we'd need to give us the necessary income with a conservative WR to meet that spending level.

That is actually the stage I am at now.

We did not, as you are doing, simply retire and then calculate how much we could withdraw from whatever we had.

That is not what I am advocating in my post above. I'm certainly in favor of doing your best to calculate what you will need, and what size portfolio that implies before retiring.

However, above I am advocating using the re-calculate step to detect quickly if you are off-course after you retire. Regardless of what the calculations say the day you retire, if calculations in later years show you are withdrawing money at an unsustainable rate, I think you are better off realizing that quickly, and adjusting your income and/or spending to get back on course.

IMO, you're making a mistake not considering how much you want/need to spend but rather simply testing for a WR that would survive given what you have and then assuming you'll somehow survive on that spending level. You really should consider how much you want/need to spend.

I definitely agree. I will want to know what I absolutely need to meet my obligations, as well as what I need to live comfortably. However, I also want to know the current best guess based on what has actually happened to my portfolio and my and my spouse's current age and current life expectancies what can I probably safely spend going forward without seriously risking a future as a Walmart greeter?

 

[youbet]

Thanks for clearing up the issue of whether you're taking projected spending levels into account. Your first post sounded as though you weren't. I'm not sure if you are in the withdrawal stage now or not. Your profile makes no mention.

While I do agree with you that making spending adjustments in response to negative portfolio performance could enhance survivability, the retiree needs to consider the sacrifice carefully. For example, my portfolio took a beating during the recession and I considered cutting some discretionary travel expenditures to try to "cut back." I would have withdrawn about $6k less by canceling plans and staying home.

When I thought through the facts, I eventually changed my mind. We were really looking forward to the trips and they were appropriate to our age and perhaps not postponable. (Outdoorsy stuff we'd likely not be fit enough to do later). And the money saved represented a small portion of our portfolio losses. I think we were down about $240k at the time and cancelling the travel would have meant we'd only be down $234k (by returning the $6k to the portfolio). Hardly seemed to matter enough to justify changing important life plans.

In the end, it turned out the portfolio recovered despite not cutting back, we enjoyed the heck out of the trips and our basic withdrawal plans are forging ahead. We're in our 5th year of withdrawals.

My point is that your yearly testing may be too sensitive and whip saw your plans causing sacrifices which will be out of proportion to their positive impact on your portfolio. And, of course, not considering portfolio performance at all might be not sensitive enough.

I can't say that I agree with your six step procedure for a number of reasons. But methods of modulating WR's to accomodate portfolio performance over time are many and varied and yours could as easily be the best as mine. Perhaps we can compare results in a decade or so and see how things are going?

In the meantime, be sure to enjoy life.

 

[rob1221]

I have been using the 4% withdrawl and my portfolio has gained except in 2008 but i made back all those losses in 2009. Since we are in a bear market and have been since 2000 BTW the average bear market lasts 18 years. I am still to young to collect social security. I am a 100% Vanguard investor and I use 40% High yield bonds as a proxy for stocks my equity holdings are about 6% I also hold corporate long bonds my current porfolio generates 4% in interest and dividends so I dont lose sleep over a shinking portfolio by needing to sell equities to raise cash. I sweep all my interest and dividends into a money market. I am also getting about 4-5% in capital appreciation. For me stocks just do not pull the wagon and have not for ten years. I am still shocked that so many people are 60% plus in stocks at retirement age.

 

[walkinwood]

I have been using the 4% withdrawl and my portfolio has gained except in 2008 but i made back all those losses in 2009. Since we are in a bear market and have been since 2000 BTW the average bear market lasts 18 years. I am still to young to collect social security. I am a 100% Vanguard investor and I use 40% High yield bonds as a proxy for stocks my equity holdings are about 6% I also hold corporate long bonds my current porfolio generates 4% in interest and dividends so I dont lose sleep over a shinking portfolio by needing to sell equities to raise cash. I sweep all my interest and dividends into a money market. I am also getting about 4-5% in capital appreciation. For me stocks just do not pull the wagon and have not for ten years. I am still shocked that so many people are 60% plus in stocks at retirement age.

Rob, Welcome to the board. Please consider introducing yourself in the Here I am... forum with some details about your ER, how you made it happen and your investment plan. Sounds interesting.