Don't tell anyone, but I found the secret to success!

[megacorp-firee]

I meant to put a little abstract in here somewhere. Thanks for the reminder!

Thanks Fuego, this is perfect. I will let you all know in 9 or so years.

 

[ESRBob]

Thanks for a very thoughtful post. I need to set a portfolio value that will send me back to work. I plan to use the 4/95% method advocated by ESRBob in his book.

A decline in portfolio in the first few years is a good reason to rethink ER especially for those like me, who are in their late 40s or younger. There is a better chance of getting back to your old salary levels than if you wait 10-15 years.

However, I think if you did the analysis, the false-indicators would overwhelm any meaningful guidelines.

I think I'll set it to 20% below initial value in the first 5 years. There is no science behind that number - just a feeling of comfort.

Fuego,
This approach is intuitively appealing but I am not sure it is useful as the principal 'Go-NoGo' indicator for deciding whether to give up on ER and go back to work, since it is based on very specific mining of historical market prices. In other words, it is based on hoping that the specific bad string of market returns that got you in the pickle will unwind similarly to the 2 or 3 previous market slumps/inflation scenarios in the historical data.

Clearly if you've lost 40% or 50% of your capital, it would be high time to cut back on your regular inflation-adjusted withdrawals. But why wait that long?

I much prefer the method of making annual adjustments to spending based on actual market results. By taking a straight % of your portfolio value each year, you'll be making the annual micro-adjustments to portfolio withdrawal that improve survivability, while giving yourself lots of time to adjust to the reality of needing to earn a little extra cash or cut back on spending if need be.

But most importantly, if fortune is kind, you'll be able to safely increase spending each year in step with your rising portfolio balance. You don't have to 'bank' any increases against future losses since, in effect, every year is Year #1 in the traditional withdrawal scheme sense, and no one ever worries about running out of money in the first year of retirement, right? (Of course if you don't need the money, don't spend it, but it's nice to know if you can).

Some other threads here go into the details, but it basically is the way institutions/foundations manage their grants and disbursements, and is merely adapted to the needs of long term retirees. Our needs for a system to ensure annual spending within bounds (not identical real spending each year, but close) while keeping the portfolio intact for the long run are quite similar.

 

[FUEGO]

ESRBob,

I tend to agree with your thinking. I am planning on doing something with my withdrawal scheme that considers portfolio value each year when determining what my annual withdrawal will be. Maybe 4% of balance each year, maybe some modification of that. Maybe 2% of the "traditional" withdrawal w/ annual inflation increases plus 2% variable withdrawal based on value of portfolio each year (a "hybrid" approach).

My goal in looking at the 4% fixed scenarios and trying to figure out what indicates failure is primarily for those folks actually employing that withdrawal scheme.

 

[rogersteciak]

I am planning on doing something with my withdrawal scheme that considers portfolio value each year when determining what my annual withdrawal will be. Maybe 4% of balance each year, maybe some modification of that.

I agree with this approach. In speculation and trading, it's referred to an anti-martingale strategy and is used as a form of risk management (Martingale (betting system) - Wikipedia, the free encyclopedia):

One activity where money management based on an anti-martingale approach has a recognized value[2] is speculation and trading. Many financial markets have some cyclical component to them, and the approach of an individual speculator or trader may only be appropriate for one portion of that cycle. Using an anti-martingale risk management scheme will increase profits during time periods when a trading approach is working well, while automatically decreasing exposure during portions of the cycle where trading is unprofitable. This is believed to decrease the risk of ruin for trading.

For the 4% SWR, when the market keeps going down for a prolonged period of time, you reduce the amount of money you withdraw from your portfolio each year (and figure out how to make ends meet some other way -- either by reducing your living expenses or finding other sources of income to take up the slack).

When the market keeps going up for a prolonged period of time, you can increase the amount of money that you withdraw each year (but probably no more that 4% of the portfolio value to be on the safe side, but that is your call to make).