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- Oct 28, 2006
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A recent thread brought up the old question "The 4% SWR is far too conservative in most scenarios. If my early results are good, when can I adjust up?"
The first thought is to ratchet up. After all, if 4% of my initial assets is "safe", why isn't 4% of my new, higher, assets also safe?
We shared opinions, but I thought I'd do some number research. FireCalc does not provide a ratchet alternative spending plan. I thought I could download a couple key scenario factors from FireCalc and build my own model that had this possibility.
Here's the result. First, the standard 4% SWR. I started with a $1 million portfolio and $40,000 of spending. This table has the results. All these numbers could be found in the regular FireCalc Excel output, but I reproduced them to check my model.
The four rows represent four quartiles of scenarios. They are sorted by the assets at the end of year 10. The first four columns are average withdrawals for the indicated years. The next two are average assets at the end of years 10 and 30. The last two are the number of scenarios that end below $0, and the number of scenarios where the assets get below $200k, but stay above $0.
As we all know, there are 6 failures. They are all in the quatile of scenarios that start out poorly.
Next, I have a simple ratchet. The payout goes up to 4% of the last year end balance, whenever that results in an increase, and never goes down.
This introduces new failures. As you'd expect, they tend to come in years that are just prior to failure years in the simple 4% SWR. One or two good years cause a ratchet up, then you're in a failure year with no cushion.
But, of course, I get to spend more money in the good scenarios. I'm somewhat disappointed that much of the extra money comes in the later years. And, ending assets are lower, as expected. I leave less money on the table.
I tried to get rid of those extra failures by doing a bump up, without the ratchet. So this is 4% of the higher of the initial assets or the assets at the last year end. Unlike the ratchet, a bad year following a good year results in withdrawals that go back toward the initial level.
This was successful in getting rid of the extra failures. That's kind of surprising, I'll guess there are other sets of scenarios where it wouldn't do quite as well.
But, the payout is less than the ratchet. Net, I think the success/payout combination is better here than in the simple ratchet.
This brings up the common point that people with good downside flexibility can spend more in general. To illustrate that, I did a percent of last balance plan. Unlike FireCalc, my floor is a percent of the initial portfolio.
In this case I picked 6% of last year's assets, with a floor of 3.4% of the initial portfolio. This illustrates the not surprising fact that retirees with a lot of cushion in their beginning assets can be quite aggressive with early payouts.
I think the increase in payouts is pretty remarkable, given the good success rate. I'd say that percent of current portfolio strategies definitely dominate for people who can stomach the downside.
(I'll admit to data mining here. I backed into the 3.4% to get the success rate I wanted. Other scenarios might have other results.)
The first thought is to ratchet up. After all, if 4% of my initial assets is "safe", why isn't 4% of my new, higher, assets also safe?
We shared opinions, but I thought I'd do some number research. FireCalc does not provide a ratchet alternative spending plan. I thought I could download a couple key scenario factors from FireCalc and build my own model that had this possibility.
Here's the result. First, the standard 4% SWR. I started with a $1 million portfolio and $40,000 of spending. This table has the results. All these numbers could be found in the regular FireCalc Excel output, but I reproduced them to check my model.
The four rows represent four quartiles of scenarios. They are sorted by the assets at the end of year 10. The first four columns are average withdrawals for the indicated years. The next two are average assets at the end of years 10 and 30. The last two are the number of scenarios that end below $0, and the number of scenarios where the assets get below $200k, but stay above $0.
Fixed… | Yr 1-5 …. | Yr 6-10 ….. | Yr 11-20 .. | Yr 21-30 .. | EOY 10 ……… | EOY 30 ……… | < $0 | < $200k |
Q1 … | 40,000 | 40,000 | 40,000 | 40,000 | 2,010,508 | 3,289,304 | - | - |
Q2 | 40,000 | 40,000 | 40,000 | 40,000 | 1,393,635 | 2,121,818 | - | - |
Q3 | 40,000 | 40,000 | 40,000 | 40,000 | 1,031,607 | 1,382,206 | - | 1 |
Q4 | 40,000 | 40,000 | 40,000 | 40,000 | 576,981 | 490,319 | 6 | 2 |
Next, I have a simple ratchet. The payout goes up to 4% of the last year end balance, whenever that results in an increase, and never goes down.
Ratchet… | Yr 1-5 …. | Yr 6-10 ….. | Yr 11-20 .. | Yr 21-30 .. | EOY 10 ……… | EOY 30 ……… | < $0 | < $200k |
Q1 | 46,915 | 65,607 | 85,946 | 95,608 | 1,787,993 | 1,272,450 | - | - |
Q2 | 44,189 | 52,850 | 62,780 | 71,903 | 1,291,791 | 963,000 | - | 2 |
Q3 | 43,093 | 46,653 | 49,973 | 56,400 | 976,101 | 692,599 | 2 | 2 |
Q4 | 40,615 | 40,840 | 41,594 | 43,584 | 570,161 | 374,296 | 7 | 1 |
But, of course, I get to spend more money in the good scenarios. I'm somewhat disappointed that much of the extra money comes in the later years. And, ending assets are lower, as expected. I leave less money on the table.
I tried to get rid of those extra failures by doing a bump up, without the ratchet. So this is 4% of the higher of the initial assets or the assets at the last year end. Unlike the ratchet, a bad year following a good year results in withdrawals that go back toward the initial level.
4/4… | Yr 1-5 …. | Yr 6-10 ….. | Yr 11-20 .. | Yr 21-30 .. | EOY 10 ……… | EOY 30 ……… | < $0 | < $200k |
Q1 | 46,557 | 62,854 | 78,621 | 71,276 | 1,812,332 | 1,806,705 | - | - |
Q2 | 43,773 | 49,670 | 56,784 | 59,830 | 1,314,378 | 1,360,384 | - | - |
Q3 | 42,107 | 42,424 | 44,401 | 51,502 | 1,008,030 | 1,080,837 | - | 1 |
Q4 | 40,329 | 40,049 | 40,453 | 42,308 | 575,330 | 447,735 | 6 | 2 |
But, the payout is less than the ratchet. Net, I think the success/payout combination is better here than in the simple ratchet.
This brings up the common point that people with good downside flexibility can spend more in general. To illustrate that, I did a percent of last balance plan. Unlike FireCalc, my floor is a percent of the initial portfolio.
In this case I picked 6% of last year's assets, with a floor of 3.4% of the initial portfolio. This illustrates the not surprising fact that retirees with a lot of cushion in their beginning assets can be quite aggressive with early payouts.
6/3.4… | Yr 1-5 …. | Yr 6-10 ….. | Yr 11-20 .. | Yr 21-30 .. | EOY 10 ……… | EOY 30 ……… | < $0 | < $200k |
Q1 | 66,334 | 81,321 | 86,978 | 64,132 | 1,471,048 | 961,188 | - | - |
Q2 | 61,942 | 64,367 | 62,624 | 53,594 | 1,070,334 | 716,025 | - | 1 |
Q3 | 57,571 | 52,166 | 46,799 | 47,823 | 845,534 | 619,930 | - | 5 |
Q4 | 50,506 | 38,753 | 38,610 | 40,476 | 538,151 | 452,880 | 3 | 4 |
(I'll admit to data mining here. I backed into the 3.4% to get the success rate I wanted. Other scenarios might have other results.)
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