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Old 09-03-2017, 10:45 AM   #21
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I find Kitces quite straightforward and his work with other financial gurus, like Pfau, has actually challenged them, pointed out some of the flaws in their approach, and if he turns around and co-publishes the improved version, that's cool.

Kitces can think outside the box.

Pfau often seems to have blinders on.

Kitces is so much smarter AND more practical than Pfau.
I think both are invaluable. Kitces basically says that 4% has always worked and implies that it therefore will always work. Pfau is just more conservative and looks at present bond rates and stock prices and tries to determine what the future might look like. Also Pfau is "the safety first" school, Kitces is "probability based" school of thought. Pfau wants a guaranteed floor, that's why he goes for SPIAs to get that floor, Kitces isn't against them but feel that they're not needed.

Neither are wrong, just different approaches.
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Old 09-03-2017, 10:57 AM   #22
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Originally Posted by pb4uski View Post
Not really... perhaps a popular misception. You can prove it is false using Firecalc.

40k spending, $1m portfolio, 30 years.... 94.9% success rate
On Portfolio tab, change expenses from 0.18% to 1.18%... success rate declines to 82.9%
Use Investigate tab solve for spending to achieve 94.9% success rate...



So all else being equal, that 1% AUM fee reduces SWR from 4% to ~3.5%.
Thanks pb4uski. Instinctively, I would have thought it lowered SWR to 3%, but since the traditional SWR is % of initial portfolio adjusted for inflation irrespective of the portfolio value; and since the portfolio goes to 0 in the worst case, SWR doesn't drop the full 1% of the advisor fee.

I've got find the time to see what happens to the terminal value of the portfolio for the median and best case scenario. Its just that I'm so damn busy in ER
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Old 09-03-2017, 11:03 AM   #23
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Thanks pb4uski. Instinctively, I would have thought it lowered SWR to 3%, but since the traditional SWR is % of initial portfolio adjusted for inflation irrespective of the portfolio value; and since the portfolio goes to 0 in the worst case, SWR doesn't drop the full 1% of the advisor fee.

I've got find the time to see what happens to the terminal value of the portfolio for the median and best case scenario. Its just that I'm so damn busy in ER
Not quite sure what you mean by the last part but I'm pretty sure that the median and best case portfolio terminal values would be about the same for 0.18% ER/4% WR and 1.18% ER/3.5% WR if that is what you are asking since the beginning portfolio value is the same ($ 1 million) and success rate are about the same.
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Old 09-03-2017, 01:47 PM   #24
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Not quite sure what you mean by the last part but I'm pretty sure that the median and best case portfolio terminal values would be about the same for 0.18% ER/4% WR and 1.18% ER/3.5% WR if that is what you are asking since the beginning portfolio value is the same ($ 1 million) and success rate are about the same.
There is a difference. Here are my Firecalc results.

With 1,000,000 and 4% SWR, .18% expense ratio, 30 years
FIRECalc looked at the 117 possible 30 year periods in the available data, starting with a portfolio of $1,000,000 and spending your specified amounts each year thereafter.
Here is how your portfolio would have fared in each of the 117 cycles. The lowest and highest portfolio balance at the end of your retirement was $-400,986 to $5,679,475, with an average at the end of $1,849,457. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)
For our purposes, failure means the portfolio was depleted before the end of the 30 years. FIRECalc found that 6 cycles failed, for a success rate of 94.9%.


With 1,000,000, and 3.58% SWR, 1.18% expense ratio, 30 years

FIRECalc looked at the 117 possible 30 year periods in the available data, starting with a portfolio of $1,000,000 and spending your specified amounts each year thereafter.
Here is how your portfolio would have fared in each of the 117 cycles. The lowest and highest portfolio balance at the end of your retirement was $-314,266 to $4,273,503, with an average at the end of $1,386,229. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)
For our purposes, failure means the portfolio was depleted before the end of the 30 years. FIRECalc found that 5 cycles failed, for a success rate of 95.7%. (I asked FireCalc to investigate 94.9, but this is what it gave me).
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Old 09-03-2017, 02:47 PM   #25
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I had the same issue and could not find any way to get it closer to 94.9%.

Spending = 35,800... success rate = 95.7%
Spending = 35,900.... success rate = 94.0%
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Old 09-03-2017, 05:07 PM   #26
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An interesting exercise. I can't see myself giving 1% to an FA. But, if DW is left by herself, she may have to hire one.
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Old 09-03-2017, 05:31 PM   #27
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An interesting exercise. I can't see myself giving 1% to an FA. But, if DW is left by herself, she may have to hire one.


That's my situation exactly. DW has zero appetite for $$$ management.
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Old 09-04-2017, 05:15 AM   #28
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... if someone pays a 1% fee to an adviser, their SWR goes from 4% to 3%.
Wait a minute.
Isn't your "4%" calculated from your portfolio balance? (That's how I do it).
If you have a balance and you spent X% in fees or whatever, you calculate your SWR from that net number, not the pre-fee number. Or am I missing something?
My MF takes X% as an expense each year. I don't calculate my SWR from the pre-expense number, I calculate it from the net.
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Old 09-04-2017, 05:45 AM   #29
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yep , no different than fund expenses . it is already in the net balance when you calculate . you could say if you had that fee money your balance would be that much higher .

but then again maybe your return was higher with the higher expenses and mgmt fees than it would have been without the mgmt .. you really can't do a what if unless everything was exactly the same comparison .
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Old 09-04-2017, 07:50 AM   #30
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Wait a minute.
Isn't your "4%" calculated from your portfolio balance? (That's how I do it).
If you have a balance and you spent X% in fees or whatever, you calculate your SWR from that net number, not the pre-fee number. Or am I missing something?
My MF takes X% as an expense each year. I don't calculate my SWR from the pre-expense number, I calculate it from the net.
But, the premise is that with 4% withdrawals and market returns that at 4% you will not run out of money over a defined period of time. Those market returns are either historical like in the case of FIRECalc or random as in the case of Monte Carlo. If you reduce those market returns by a 1% AUM advisor fee then the returns are 1% lower which increases the risk of running out of money unless you make commensurate adjustments to the withdrawl rate.

Also, the 4% is of the beginning portfolio value and withdrawals increase each year for inflation... so if returns exceed inflation as they normally would the withdrawal in subsequent years would be less than 4% of the portfolio balance at the beginning of the year. See example below with 3% inflation and 8% returns:

 Withdrawal w/3% infEarnings w/8% returnBalance% of BOY balance
0  100.00 
14.007.84103.844.00%
24.128.14107.863.97%
34.248.46112.083.93%
44.378.79116.503.90%
54.509.14121.143.86%

That said, while many people advocate 4% of the balance, that is not what the 4% "rule" is based on. However, while you will never run out of money under that approach, you could end up withdrawing a lot less than you need to live on.
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Old 09-04-2017, 07:57 AM   #31
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.... (I asked FireCalc to investigate 94.9, but this is what it gave me).
Quote:
Originally Posted by pb4uski View Post
I had the same issue and could not find any way to get it closer to 94.9%.

Spending = 35,800... success rate = 95.7%
Spending = 35,900.... success rate = 94.0%
Right, because of the quantization of success rates (there are only integers in "Success" and "Fail"). The algorithm gets close, but that could be plus or minus either side of the target.

A better way is to tweak the spending for each scenario until you get as close to $zero dollars remaining at the end of the period (just barely 100% success), then compare the spending in % terms (and using $1,000,000 as the default makes this easy, just shift the decimal place).

But the bottom line explanation is that for the failure path, since the portfolio is declining, fees decline as well. So the fees aren't as much a drag as they were initially (1% of $1M) compared to when the portfolio has dropped. But your initial 4% spending is the same amount (in buying power). So the effect of fees drops as the portfolio drops.

But the initial view sounds right in the more typical case of the portfolio roughly maintaining its buying power over 30 years. That's a full 1% that goes to fees, leaving you 3% of a 4% withdraw.

-ERD50
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Old 09-04-2017, 08:09 AM   #32
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No... 3% is too low, it is probably more in the 3.5-3.6% range because the 1% AUM affects returns so the impact on WR is a second order effect.
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Old 09-04-2017, 08:40 AM   #33
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An interesting exercise. I can't see myself giving 1% to an FA. But, if DW is left by herself, she may have to hire one.
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That's my situation exactly. DW has zero appetite for $$$ management.
That's what Target Date Retirement funds are for.
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Old 09-04-2017, 01:42 PM   #34
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These analyses appear to be premised upon an assumption that an investor's investment returns will not improve at all as a result of the services rendered by an adviser who charges an AUM fee. Not much point debating that point here. But it is at least possible that, for some investors, the advisor's services may improve returns.
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Old 09-04-2017, 03:07 PM   #35
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I have been retired for 8 years. Let me be brutally honest: there has not been one single moment all this time, in which I thought, "gee, I wish I was working at a low paying part time job where I wasn't getting paid what I feel my time is worth". Not one. For those who think like me, it makes more sense to stick with the high income job a little bit longer so that we aren't stuck with the much lower income job for years and years.
Personally, I'm working a few years longer to ensure I pretty much absolutely don't need work for money.
That said, I can see ER people including myself working a low pay job but a lot of things need to fall into place. The work likely has to be flexible to your own schedule. It's got to be work that you enjoy or have a passion about. Pay ends up being the side benefit which might not be a lot. Heck, why do retired people do volunteer work?

I love sports and wouldn't mind doing some low pay job with one of the local teams. I'd probably take a low paying job where I learned some new cooking techniques.
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Old 09-04-2017, 04:03 PM   #36
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... For our purposes, failure means the portfolio was depleted before the end of the 30 years. FIRECalc found that 5 cycles failed, for a success rate of 95.7%. (I asked FireCalc to investigate 94.9, but this is what it gave me).
It's because of the quantization with only 117 cycles of 30 years to work with.

If FIRECalc increases the WR so that 6 cycles failed instead of 5, the success rate then becomes 1 - 6/117 = 94.87%.

That happens to be just slightly less than your requested 94.9%, so I think FIRECalc gives you the next higher outcome with 5 failed cycles.
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Old 09-04-2017, 08:39 PM   #37
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Not really... perhaps a popular misception. You can prove it is false using Firecalc.

40k spending, $1m portfolio, 30 years.... 94.9% success rate
On Portfolio tab, change expenses from 0.18% to 1.18%... success rate declines to 82.9%
Use Investigate tab solve for spending to achieve 94.9% success rate...



So all else being equal, that 1% AUM fee reduces SWR from 4% to ~3.5%.
This seems quite incorrect, so if I were to administer my portfolio myself and charge myself 1% I could therefore from a million dollar portfolio take $35,000 as a 94.9% safe and pay myself $10,000 for a total of $45,000 and that would be the same as if I said forget the fees and just withdrew $40,000. That just seems….wrong
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Old 09-04-2017, 09:00 PM   #38
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This seems quite incorrect, so if I were to administer my portfolio myself and charge myself 1% I could therefore from a million dollar portfolio take $35,000 as a 94.9% safe and pay myself $10,000 and that would be the same as if I said forget the fees and just withdrew $40,000. That just seems….wrong
The apparent paradox is explained by the fact that the 1% fee isn't constant with your inflation adjusted withdrawals. If you follow a failure curve in FIRECalc, the portfolio is dropping, so the 1% of portfolio fee drops as well. So the scenario you describe is really only true for the first few years.

Regardless, a 1% fee is going to hurt in the worst case, and take even more $ from your allowed spending (or heirs/charities spending) in the cases where the portfolio does not shrink so much.

-ERD50
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Old 09-04-2017, 10:29 PM   #39
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This seems quite incorrect, so if I were to administer my portfolio myself and charge myself 1% I could therefore from a million dollar portfolio take $35,000 as a 94.9% safe and pay myself $10,000 for a total of $45,000 and that would be the same as if I said forget the fees and just withdrew $40,000. That just seems….wrong
It is actually correct.... if perhaps not very intuitively obvious. You can easily prove it with a simple deterministic model. Model a 4% withdrawal rate over 30 years with 3% inflation.... to end up with a zero balance you need to have a return of 4.046%. Now reduce the return by 1% to 3.046% and solve for the WR at which you have a zero balance after 30 years... it is 3.457%... reasonably close to the FIRECalc result of 3.5%.

 WithdrawalBalance
 3.00%4.046%
0  1,000.00
1 40.00 1,000.46
2 41.20 999.73
3 42.44 997.75
4 43.71 994.40
5 45.02 989.61
6 46.37 983.28
7 47.76 975.30
8 49.19 965.56
9 50.67 953.96
10 52.19 940.36
11 53.76 924.65
12 55.37 906.69
13 57.03 886.34
14 58.74 863.46
15 60.50 837.89
16 62.32 809.47
17 64.19 778.03
18 66.11 743.40
19 68.10 705.38
20 70.14 663.77
21 72.24 618.38
22 74.41 568.99
23 76.64 515.37
24 78.94 457.27
25 81.31 394.46
26 83.75 326.67
27 86.26 253.62
28 88.85 175.03
29 91.52 90.60
30 94.26 (0.00)

 WithdrawalBalance
 3.00%3.046%
0  1,000.00
1 34.57 995.89
2 35.61 990.61
3 36.68 984.11
4 37.78 976.31
5 38.91 967.14
6 40.08 956.52
7 41.28 944.38
8 42.52 930.62
9 43.79 915.17
10 45.11 897.94
11 46.46 878.83
12 47.86 857.75
13 49.29 834.58
14 50.77 809.24
15 52.29 781.59
16 53.86 751.54
17 55.48 718.95
18 57.14 683.71
19 58.86 645.68
20 60.62 604.73
21 62.44 560.71
22 64.31 513.47
23 66.24 462.87
24 68.23 408.74
25 70.28 350.91
26 72.39 289.22
27 74.56 223.47
28 76.79 153.48
29 79.10 79.06
30 81.47 -
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Old 09-05-2017, 12:37 AM   #40
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The apparent paradox is explained by the fact that the 1% fee isn't constant with your inflation adjusted withdrawals. If you follow a failure curve in FIRECalc, the portfolio is dropping, so the 1% of portfolio fee drops as well. So the scenario you describe is really only true for the first few years.

Regardless, a 1% fee is going to hurt in the worst case, and take even more $ from your allowed spending (or heirs/charities spending) in the cases where the portfolio does not shrink so much.

-ERD50
Yes. As your portfolio drops due to "withdrawal+fee" the basic WR model in FIRECalc lets you withdraw the same amount (with inflation adjustment), but the 1% fee drops along with the portfolio. At the 30th year, you still have the same annual money to spend right before you expire, but your FA gets diddly-squat.

Look at it this way. It's going to hurt your FA more than it hurts you.
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