Greater than 4% Withdrawal Rate

[tryan]

Here's another angle ... rather than "fretting" over the nth decmail place of your SWR, think about the probability that some external force will end your retirement.

"FIRE killers" come in many forms: divorce, health crisis to you OR and family member, uninsurable catastrophic event (flood, war/terrorism), being hit by the beer-truck/lightning/meteor ..... Add these risks together (divorce rate is 50%!) and I dare say a SWR success rate in excess of 80-90% is simply a waste of time.

So while you're fretting over 4 or 4.5% SWR ... DW/DH is screwing the lawn-boy/maid, Mr. Cancer has a little surprise waiting for you, and Abul moved in next door . (Not wishing any of this on any of us ... just making a point )

[Cb]

A few years ago on a Motley Fool thread about doing a Portfolio Reset after a few good years, a poster pointed out that if one looks at <100% success rates, ER failures tend to occur when one retires at the start of a bad run (like 1929, 1967, etc).

The poster pointed out that if you were to use frequent resets in your early retirement, you'd were essentially systematically hunting for that rough patch.

Then again, if you were resetting up & down frequently you're essentially drawing a nearly fixed % of portfolio, and foregoing a steady standard of living.

Cb

[Running_Man]

Quote:

That's fine, but to retain your success rate long term, you'd also need to decrease your withdrawals to 4% of a lower denominator when the market is down. If you just cherry pick the up years to reset your thermostat, you will lower your success rate.

What I am saying is that if you select 4% and stick with it your odds are constantly changing, only that change is not being recognized by the retiree - because in the head of the retiree they are 95% "safe" with 4% when in actuality it is a constantly changing safety result based on the most recent experience. Any time you reset to a 95% safety rate you go to a 4% withdrawl of your present balance for 30 years- up or down. That is optimizing your safety rate not your return. If you do not reset in the bad years than your safety may be in the 80% range - but that does not mean because you never reset from the 1st year your portfolio risk is still 95% safe. You may well only be 80% safe.

As for the risks by divorce and disease - well be careful where you place your deposits

[Rich_by_the_Bay]

Quote:

Originally Posted by Cb A few years ago on a Motley Fool thread about doing a Portfolio Reset after a few good years, a poster pointed out that if one looks at <100% success rates, ER failures tend to occur when one retires at the start of a bad run (like 1929, 1967, etc).

That's a scarey scenario. My antidote will be to work part time initially, leaving my full retirement date flexible until I see how the nest egg is doing, and hitting FIRE with a bunch of cash to last a good while, if necessary.

[cute fuzzy bunny]

We had a lengthy and sometimes unproductive thread regarding the 'reset' situation and 'altered state SWRs'.

Does have some good stuff in it:

http://early-retirement.org/forums/i...hp?topic=667.0

By the way, every ER I know has gone through the month/quarter/year long process of satisfying their inner scaredy cat about retiring early. I went through all the calculators and all the numbers and in the end felt better about throwing out everything I'd been programmed was "the right way". No job, no income, no structure.

Takes a little getting used to.

For what its worth, my financial picture has improved year on year since 2000, utilizing the "invest wisely and at low expenses, dont pay the tax man a penny more than you have to, spend less when my investments are sucking, spend more when things are going well, minimize expenses but enjoy your life" withdrawal method.

[retire@40]

Quote:

Originally Posted by Rich_in_Tampa That's a scarey scenario. My antidote will be to work part time initially, leaving my full retirement date flexible until I see how the nest egg is doing, and hitting FIRE with a bunch of cash to last a good while, if necessary.

My approach has been to build up a large enough portfolio, take my foot off the work accelerator and coast at part-time.

By working part-time, if I can keep earning just enough to live on while my portfolio keeps growing to my anticipated FIRE level, I would have accomplished the goal of FIRE while keeping the security of my own business that I could ratchet up if the portfolio didn't perform as anticipated. And, in the meanwhile I've reduced my stress level, semi-retired, and started enjoying life more while I'm still young.

Using this approach, it's a comfort to know that you can reduce your earnings by as much as 4% of whatever your portfolio value is at any given point should you decide to start your withdrawal phase. Right now, my 4% SWR would give me about 70% of my current budget, so I would just need to make up the remaining 30% with some earnings from work.

[WRBT]

I still don't understand how resetting on good years can in any way impact your initial chance of success that's based on a certain withdrawal rate.

Jane retires in 2005 with 1,000,000 and decides on a 4% withdrawal rate (40,000) that gives 95% chance of success. What a great year, Jane's portfolio in 2006 is now 1,200,000. Jane resets and decides to take 4% from her new stash so now she's living large with 48,000 withdrawal. 4% rate, 95% chance of success.

Joe retireds in 2006 with 1,200,000 and decides on a 4% withdrawal rate. 95% chance of success.

Is Joe's chance of succcess any different from Jane's? They are both have the same sized stash and the same withdrawal rate. If their chances of success are the same (95%) starting in year 2006 then Jane's cherry picking her good year didn't matter.

You are correct!

[Cb]

Quote:

Originally Posted by tui_xiu I still don't understand how resetting on good years can in any way impact your initial chance of success that's based on a certain withdrawal rate. Jane retires in 2005 with 1,000,000 and decides on a 4% withdrawal rate (40,000) that gives 95% chance of success. What a great year, Jane's portfolio in 2006 is now 1,200,000. Jane resets and decides to take 4% from her new stash so now she's living large with 48,000 withdrawal. 4% rate, 95% chance of success. Joe retireds in 2006 with 1,200,000 and decides on a 4% withdrawal rate. 95% chance of success. Is Joe's chance of succcess any different from Jane's? They are both have the same sized stash and the same withdrawal rate. If their chances of success are the same (95%) starting in year 2006 then Jane's cherry picking her good year didn't matter.

If you're ER'ing with at a 95% "success rate", you've got a pretty slim chance (~1 in 20) of having picked the worst year or two that leads to a busted ER. A few years later, with a little growth, you've grown away from the 95% rate, perhaps up to 100% and it's smooth sailing.

But if you reset after every up year, you're right back up to that 1 in 20 chance, again and again...do that 10 or 20 times and there's a mighty good chance you'll find that troublesome patch.

Cb

[donheff]

Quote:

Originally Posted by Running_Man What I am saying is that if you select 4% and stick with it your odds are constantly changing, only that change is not being recognized by the retiree -

Yeah, that is the reality. If you retire on x% SWR and the market falls the following year, all of the Firecalc scenarios that involved first year increases are out of the picture. Lets say that is 50% of the scenarios. Your 95% safe estimate would now drop to 90% or whatever. You have more info now than you had when you started. The problem with adjusting to the market is to figure out how much of an adjustment. Thus the Guyton rules, etc. A simple approach might be to set a rate against current portfolio (e.g. 4% or 5%) and always withdraw that = 100% success rate. If the initial rate allows you to LBYM you can invest the excess in a separate fund to smooth out the bumps in the down years. If the down years just keep coming - well, you would have been toast anyway.

[brewer12345]

Quote:

Originally Posted by Cb If you're ER'ing with at a 95% "success rate", you've got a pretty slim chance (~1 in 20) of having picked the worst year or two that leads to a busted ER. A few years later, with a little growth, you've grown away from the 95% rate, perhaps up to 100% and it's smooth sailing. But if you reset after every up year, you're right back up to that 1 in 20 chance, again and again...do that 10 or 20 times and there's a mighty good chance you'll find that troublesome patch. Cb

But you are also a year older every time you reset. Do it 10 or 20 times and you will be 10 or 20 years older and the money won't need to last as long (AKA you r withdrawal period will be shorter). So there is a counter-balance.

[Rich_by_the_Bay]

Quote:

Originally Posted by brewer12345 But you are also a year older every time you reset. ...and the money won't need to last as long (AKA you r withdrawal period will be shorter). So there is a counter-balance.

... and less time to recover after a prolonged down market, no? Resetting too often seems to increase your volatility risk either way.

[brewer12345]

Quote:

Originally Posted by Rich_in_Tampa ... and less time to recover after a prolonged down market, no? Resetting too often seems to increase your volatility risk either way.

I think we need a statistics wonk to tell us, because so much of stats is counter-intuitive.

I don't imagine it would be smart to push the envelope, but resetting every few years after you atrted out with a very safe WR should be OK. If you expect a 30 year draw and make it 15 years with your capital still intact, you can afford to do a lot of damage in the remaining years.

[FIRE'd@51]

I'm sure others have probably done this. I ran the standard FIREcalc for a whole bunch of equity/bonds mixes and found that the highest SWR which gives a 100% success rate for a 30-yr time frame is 3.75%, which occurs for a 36/64 equity/bond mix. (For a 75/25 mix the highest SWR is 3.59%). So, if one believes FIREcalc provides the worst-case scenario, why not simply choose the highest SWR that gives a 100% success rate. Then one should be able to "restart the clock" with 100% confidence whenever one wants.

[brewer12345]

Quote:

Originally Posted by FIRE'd@51 I'm sure others have probably done this. I ran the standard FIREcalc for a whole bunch of equity/bonds mixes and found that the highest SWR which gives a 100% success rate for a 30-yr time frame is 3.75%, which occurs for a 36/64 equity/bond mix. (For a 75/25 mix the highest SWR is 3.59%). So, if one believes FIREcalc provides the worst-case scenario, why not simply choose the highest SWR that gives a 100% success rate. Then one should be able to "restart the clock" with 100% confidence whenever one wants.

I think the problem is that there is an implicit assumption that the future will be no worse than the past. But we a splitting harirs here.

[MasterBlaster]

Quote:

Originally Posted by FIRE'd@51 I'm sure others have probably done this. I ran the standard FIREcalc for a whole bunch of equity/bonds mixes and found that the highest SWR which gives a 100% success rate for a 30-yr time frame is 3.75%, which occurs for a 36/64 equity/bond mix. (For a 75/25 mix the highest SWR is 3.59%). So, if one believes FIREcalc provides the worst-case scenario, why not simply choose the highest SWR that gives a 100% success rate. Then one should be able to "restart the clock" with 100% confidence whenever one wants.

From the Retire early homepage study on SWR's...

http://www.retireearlyhomepage.com/restud1.html

Note: Check your asset allocation as it disagrees with the chart

[Cb]

Quote:

Originally Posted by brewer12345 But you are also a year older every time you reset. Do it 10 or 20 times and you will be 10 or 20 years older and the money won't need to last as long (AKA you r withdrawal period will be shorter). So there is a counter-balance.

No doubt, aging offsets a bit of the roulette game you play with frequent resets.

Here's how I look at it:

Bailing once your portfolio is in the 95% zone is probably safe enough...if the sh7t hits the fan in the early going you're still fairly young and marketable should it come to that. If you keep running right back up to the 95% threshold with regular resets you might just find that rough patch when you're 68 with only Windows 95 skilz...

Cb

[Cb]

A few years ago I was thinking hard about the different variable wihdrawal schemes I was finding on the internets...Gummy's "Sensible Withdrawals", Guytron's 67 Rules, SG's FIREcalc expense ratio trickery, Bob90210's website, etc.

The "safety bonus" or somewhat higher SWR they offered was appealing, but I was still reluctant to go into retirement on that basis because whatever the variation in the WR would obviously have to come out of the discretionary half of our spending.

But a while back I had something of a brainstorm (by my standards)...I realized that of my discretionary budget items, a goodly percentage were for "long-cycle" things like car replacements, every-third-year Hawaii trips, home redecorating, etc, as opposed to "short-cycle" discretionary expenses like dinners out, rounds of golf, and entertainment.

It then occurred to me that a variable withdrawal strategy really wouldn't be all that painful in reality...we could simply time our long-cycle expenditures - in other words, putting off a Hawaii trip or car replacement during a market downturn. Delaying those expenditures until markets improve should allow us to leave our routine discretionary expenditures pretty much alone.

Cb

[Rich_by_the_Bay]

Quote:

Originally Posted by Cb But a while back I had something of a brainstorm (by my standards)...I realized that of my discretionary budget items, a goodly percentage were for "long-cycle" things like car replacements, every-third-year Hawaii trips, home redecorating, etc, as opposed to "short-cycle" discretionary expenses like dinners out, rounds of golf, entertainment. It then occurred to me that a variable withdrawal strategy really wouldn't be all that painful in reality...we could simply time our long-cycle expenditures - in other words, putting off a Hawaii trip or car replacement during a market downturn. Delaying those expenditures until markets improve should allow us to leave our routine discretionary expenditures pretty much alone.

Exactly. A "percent of assets" strategy and some flexibility is appealing.

You basically never worry about running out of money. You could run out of "lifestyle," though, so you need to be sure that the fat you might need to trim during down years is just that, fat. That is, you need a good cushion over and above your standard, comfortable expenses. But when stocks are up, it's playtime.

[sgeeeee]

Quote:

Originally Posted by tui_xiu I still don't understand how resetting on good years can in any way impact your initial chance of success that's based on a certain withdrawal rate. Jane retires in 2005 with 1,000,000 and decides on a 4% withdrawal rate (40,000) that gives 95% chance of success. What a great year, Jane's portfolio in 2006 is now 1,200,000. Jane resets and decides to take 4% from her new stash so now she's living large with 48,000 withdrawal. 4% rate, 95% chance of success. Joe retireds in 2006 with 1,200,000 and decides on a 4% withdrawal rate. 95% chance of success. Is Joe's chance of succcess any different from Jane's? They are both have the same sized stash and the same withdrawal rate. If their chances of success are the same (95%) starting in year 2006 then Jane's cherry picking her good year didn't matter.

You have it right. A lot of people do not understand that FIRECalc is a worst case calculator or understand what that means. Averages are irrelevant. Additional wealth puts you on a different worst case trajectory and it only takes one good year, one lottery winning, or one windfall of any kind to put you on that new trajectory. You don't need to stack up good years before you have a different situation than the original simulation.

Being more conservative than the FIRECalc maximum SWR won't hurt anyone though and there are lots of other valid reasons not ot take a historical simulation result as a precise value. People don't have to understand the mathematical nuances of SWR simulations to have a safe retirement plan.