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Old 11-18-2016, 09:28 AM   #121
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The link to the graph will not work. You need to capture the graph to a bitmapped graphics file, then post it.

I think it is going to be tough to beat the "fixed dollar amount adjusted for inflation" withdrawal method. Converted to percentage of current portfolio value, it will be low during boom years, and high during lean years. This allows surplus to be built up in good years to be spent in bad years.

The method of "fixed percentage of remaining portfolio" will not run out of money, but that's because it can choke off the withdrawal to a trickle.

The problem any method has is that a bull market can run for nearly 20 years like it did in 1983-2000, and a bear market can also be for a similarly long period. No matter what you do, you cannot squeeze money out of any investment instrument when everything just sucks.
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Old 11-18-2016, 09:44 AM   #122
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It's the same approach to: how long will I live?

Statistics, history and biology can give a solid estimate, but nothing guarantees your next minute. Mind uploading at the other extreme is a fantasy right now, but inventions that seemed stranger have happened.

Take a reasonable safety buffer, and stay flexible.
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Old 11-18-2016, 02:23 PM   #123
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Originally Posted by audreyh1 View Post
Your posted graph was blank for some reason.
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The link to the graph will not work. You need to capture the graph to a bitmapped graphics file, then post it.
Thanks, I'd forgotten about that "feature." Maybe the file below will show up.

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I think it is going to be tough to beat the "fixed dollar amount adjusted for inflation" withdrawal method. Converted to percentage of current portfolio value, it will be low during boom years, and high during lean years. This allows surplus to be built up in good years to be spent in bad years.

The method of "fixed percentage of remaining portfolio" will not run out of money, but that's because it can choke off the withdrawal to a trickle.
There's obviously no perfect method that suits everyone. Some of us can't tolerate much variation of our annual withdrawals, while others can accommodate it (due to existing pensions, SS provides a high percentage of our "must have" essential spending, etc). In the case of my household, high annual variability in portfolio withdrawals can be accomodated, and "% of year end value" method helps to assure that the portfolio will survive to provide income for a lifetime and doing things this way generally results in greater lifetime withdrawals

Hybrid approaches will appeal to many.
- Straight % of year end value modified by Clyatt's 95% rule
- Audrey's "put extra aside for a rainy day" method
- VPW
- Professor Gummy's "extra's method" (described here, but in a nutshell in a post by MasterBlaster:
Quote:
On a related topic, there was a link (from poster Charlie) to Gummy-stuff's website yesterday that discussed a withdrawel plan where you took a 3% SWR that was augmented with some percentage of your portfolio gain over the inflation rate (ie. 50%). Basically you only take extra money out when the portfolio exceeds that for a 3% SWR plus inflation. The survival rates were the same as using a 4% SWR.

sensible withdrawals

This approach gives you (on average) a better income stream early in your ER and then it declines with time but never below the 3 % rate. Most ER's could use more cash early rather than later.

Did any of you see this ? What is your reaction ? It looks intriguing to me.

A Traditional 4% SWR on a million dollar portfolio would give you a constant $40k income adjusted for inflation. The Gummy-stuff approach gives you an initial expected income of $62k (inflation adjusted) or so declining to ~$37k (inflation adjusted) as you approach year 40 of ER with the longevity performance the same as the (safe) 4% withdrawal rate.
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Old 11-18-2016, 02:50 PM   #124
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... Below is the run for a $1M starting portfolio, 50% TM/50% 5yr Treas, using a 4.5% end-of-year withdrawal method. To me it looks like the overall trend of the 116 runs is slightly downward, and that there are a small but not insignificant number of case where, at some point, the real withdrawal amount dipped below $22,500 (i.e. 50% of the starting amount). Some folks might be comfortable with this, some might not.


Starting with drawing $45K from a $1M portfolio, this graph shows that in the worst cases, you will not be broke but stay hungry for decades living on just $20K.

And if you have $3M, you can get $60K, then have to live on what's left after taxes and healthcare. Can we all say "class C RV parked on New Mexico state land"?

In the best cases, you are fat and happy with spending in the $80K+ for decades, from the same $1M initial portfolio.

Such are the vagaries of market return!
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Old 11-18-2016, 03:38 PM   #125
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Starting with drawing $45K from a $1M portfolio, this graph shows that in the worst cases, you will not be broke but stay hungry for decades living on just $20K.
Right, but:
- This is 4.5%, not the "standard" 4%. So, a "heftier" starting WR than most people count on
- The vast majority of portfolios stayed fairly close to the starting value, and annual withdrawals stayed generally close to the central starting value. Things are a lot different if instead we use "starting amount adjusted for inflation" methods:
-- High side: Only about 5 of the 116 runs "exploded", with ending values double (or more) the size of the starting value (leaving tons of money unspent by the retiree). In general, portfolios that did well returned the $$ to the retiree as withdrawals. However, using a fixed 4.5% of starting value adjusted for inflation method, about 15 portfolios ended up "exploding (ending value at least twice as high as starting value).
-- Low side: Some of the portfolios (15%?) had long periods of providing about 1/2 of the starting withdrawals for extended periods. I'd bet these are the same ones that would have crashed entirely (zero balance) if we'd used a "4.5% starting withdrawal adjusted for inflation" withdrawal method. That produced a 23% failure rate. And these failures are really failure--a dead-broke zero-value portfolio. The "% of end-of-year balance" withdrawal method has a much more forgiving "failure" mode.
No matter which method a retiree uses, occasional "reality checks" will be needed to assure things aren't headed to the sky, or the toilet.
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Old 11-18-2016, 03:50 PM   #126
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...No matter which method a retiree uses, occasional "reality checks" will be needed to assure things aren't headed to the sky, or the toilet.
It's the cases for the latter (the toilet) that I worry about, and not the first (the blue sky).

Think about it, if one retires with $1M and initially drawing $40K, will he not be "ratcheting" it up when his portfolio will have doubled (in real terms no less), and he is 10 or 15 years older and closer to that 6-ft deep hole? That would be the least problem for anybody. I would not worry about dying rich. It's dying young that would bother me more.

On the other hand, having to live on 1/2 of what he started out is going to be a lot tougher. In my case, I think I can handle that 50% reduction with the aid of SS plus the Bernicke effect. And being on Medicare should help, compared to what I am paying now.
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Old 11-18-2016, 05:39 PM   #127
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Right, but:
- This is 4.5%, not the "standard" 4%. So, a "heftier" starting WR than most people count on
- The vast majority of portfolios stayed fairly close to the starting value, and annual withdrawals stayed generally close to the central starting value. Things are a lot different if instead we use "starting amount adjusted for inflation" methods.
- High side: Only about 5 of the 116 runs "exploded", with ending values double the size of the starting value (leaving tons of money unspent by the retiree). In general, portfolios that did well returned the $$ to the retiree as withdrawals. Using a fixed 4.5% of starting value adjusted for inflation method, about 15 portfolios ended up "exploding (ending value at least twice as high as starting value).
- Low side: Some of the portfolios (15%?) had long periods of providing about 1/2 of the starting withdrawals for extended periods. I'd bet these are the same ones that would have crashed entirely (zero balance) if we'd used a "4.5% starting withdrawal adjusted for inflation" withdrawal method. That produced a 23% failure rate.

No matter which method a retiree uses, occasional "reality checks" will be needed to assure things aren't headed to the sky, or the toilet.
Thanks for the details. I can't seem to read the .xls files generated by FIRECALC (other than the text), so it's good to get a better feel for the results.
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Old 11-18-2016, 06:51 PM   #128
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I did some FIRECALC runs today, and it reinforces my instincts to allow unspent funds to accumulate. Even on cases with lower withdrawals such as 3%, 3.25%, 3.3% a few runs seem to drop to about 55% of starting value, inflation adjusted, before recovering up to around where you started, and a more down to 64% of starting value. So you might face a year, or a few years together, where income has dropped almost in half.
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Old 11-18-2016, 07:13 PM   #129
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I did some FIRECALC runs today, and it reinforces my instincts to allow unspent funds to accumulate. Even on cases with lower withdrawals such as 3%, 3.25%, 3.3% a few runs seem to drop to about 55% of starting value, inflation adjusted, before recovering up to around where you started, and a more down to 64% of starting value. So you might face a year, or a few years together, where income has dropped almost in half.
And, since usually those dips don't last very long (stocks >generally< recover within about 3 years IIRC, esp with reinvested dividends), it wouldn't take a huge pile money to ease through a rough patch. And, if a big expense comes up (new roof, emergency car purchase, etc) when stocks are down, then having a slug of cash would be useful.

Another option for those who don't like setting aside the cash like this would be to look at the results of using the Clyatt 95% rule (which FIRECalc will model easily). It avoids year-to-year withdrawal changes of more than -5% (plus inflation), has a negligible impact on portfolio survival, and avoids the cash "drag."
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Old 11-18-2016, 07:30 PM   #130
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Those squiggly lines bunch together, and that makes it difficult to see how long a bad period has lasted in the past.

I tried to use the spreadsheet output option, but the data that is downloaded and imported into my PC is not valid. I have done this in the past, but this time the data does not make sense and does not agree with the "squiggly line" chart.
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Old 11-18-2016, 07:39 PM   #131
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Those squiggly lines bunch together, and that makes it difficult to see how long a bad period has lasted in the past.

I tried to use the spreadsheet output option, but the data that is downloaded and imported into my PC is not valid. I have done this in the past, but this time the data does not make sense and does not agree with the "squiggly line" chart.
Try renaming the files from .xls to .html and open it with a browser. You can then select and paste the data into a spreadsheet.

For the second file, the formulas in the second half won't work, but the numbers in the first half will display properly. You can at least see the numbers and you could past the following formulas into a spreadsheet if you really want to, just make sure you have the proper alignment.
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Old 11-18-2016, 07:46 PM   #132
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I was able to import them. The data does not make sense.
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Old 11-18-2016, 07:57 PM   #133
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The first file seems to be the dry run data 30 years for each year 1871 to 2015. But it looks like it's nominal $.

The second file is a single run from 1960 to 1989 in real $. I assume you can pick the year to do your run so you can test the worst cases in the first file?
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Old 11-18-2016, 08:03 PM   #134
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And, since usually those dips don't last very long (stocks >generally< recover within about 3 years IIRC, esp with reinvested dividends), it wouldn't take a huge pile money to ease through a rough patch. And, if a big expense comes up (new roof, emergency car purchase, etc) when stocks are down, then having a slug of cash would be useful.

Another option for those who don't like setting aside the cash like this would be to look at the results of using the Clyatt 95% rule (which FIRECalc will model easily). It avoids year-to-year withdrawal changes of more than -5% (plus inflation), has a negligible impact on portfolio survival, and avoids the cash "drag."
Right - you don't have to accumulate a large pile. In fact if you have an extra year's expenses set aside, that would probably bridge you across a three year run of significantly lowered income with just a slight belt tightening if necessary.

There are definitely other things you might want to have some additional cash sitting around for - an unexpected large medical expense, for example.
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Old 11-18-2016, 08:18 PM   #135
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The first file seems to be the dry run data 30 years for each year 1871 to 2015. But it looks like it's nominal $.
True, it does not look like it is inflation-adjusted, hence not too useful.
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The second file is a single run from 1960 to 1989 in real $. I assume you can pick the year to do your run so you can test the worst cases in the first file?
I've got a lot of error in this file. Perhaps both of my MS Excel and OpenOffice copies are outdated.
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Old 11-18-2016, 08:49 PM   #136
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Right - you don't have to accumulate a large pile. In fact if you have an extra year's expenses set aside, that would probably bridge you across a three year run of significantly lowered income with just a slight belt tightening if necessary...
Although I have always been one who has a lot of cash on hand (never less than 20%), I wonder how useful this cash would be in a prolonged stagflation period like in the past. The recent market crashes of 2003 and 2008 were quite sharp like a V shape, but the wide U shape was perhaps more frequent (while you live in that U shape, it feels like an L).

When inflation ran in the double digit like the late 70s for several years in a row, cash got hammered badly. You would need gold!
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Old 11-18-2016, 09:36 PM   #137
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...When inflation ran in the double digit like the late 70s for several years in a row, cash got hammered badly. You would need gold!
... or I-bonds.

I have been keeping several years of expenses in I-bonds, and it hurts my overall portfolio return. But it will at least keep the purchasing power. Gold on the other hand will even gain in value during inflationary periods. I recall in 1980 gold price reached $900. And that's 1980 dollars, which would be $2700 now. Gold is now $1200/oz.

See, if we can tell in advance what is going to happen, we know exactly what to do.
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Old 11-18-2016, 10:13 PM   #138
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When inflation ran in the double digit like the late 70s for several years in a row, cash got hammered badly. You would need gold!
Well, bonds got hammered badly. Cash, if you invested in shorter-term CDs and such, not so much.
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Old 11-18-2016, 10:34 PM   #139
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... or I-bonds.

I have been keeping several years of expenses in I-bonds, and it hurts my overall portfolio return. But it will at least keep the purchasing power. Gold on the other hand will even gain in value during inflationary periods. I recall in 1980 gold price reached $900. And that's 1980 dollars, which would be $2700 now. Gold is now $1200/oz.

See, if we can tell in advance what is going to happen, we know exactly what to do.
We've got some of the "great" I-Bonds purchased when they offered a 3+% real interest rate. The "problem" is that I recognize now (in retrospect) that they are such a great deal that I'd be >very< reluctant to cash them out prior to maturity just to get through a period of low returns. While they do contribute to our net worth, they are, effectively, off the table for selling. OTOH, I'd have no difficulty selling gold if the price was up and our stocks were down.
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Old 11-19-2016, 07:46 AM   #140
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We've got some of the "great" I-Bonds purchased when they offered a 3+% real interest rate. The "problem" is that I recognize now (in retrospect) that they are such a great deal that I'd be >very< reluctant to cash them out prior to maturity just to get through a period of low returns. While they do contribute to our net worth, they are, effectively, off the table for selling. OTOH, I'd have no difficulty selling gold if the price was up and our stocks were down.
LOL - I have the same "problem" as you. I always considered my I-bonds (about 5% of current net worth) with an average real rate of 3.3% to be my emergency fund...but now they have become a bit quasi-sacrosanct due to their relative high yield. The benefit is that I'm still working. But if I were retired, depending on how much the portfolio value and dividends dropped, I'd likely just live off of the dividends from my portfolio - which is pretty much my goal anyway when I do FIRE. If we hit a prolonged period of true disaster, then the I-bonds would slowly be taken to the chopping block to supplement the dividends. Any other alternatives like a home equity loan would likely incur a net interest expense that would be less than the benefit of keeping the I-bond.

Unless I could get a negative interest rate Home Equity loan! (which is looking less and less likely, but which did exist for a short period of time in some European countries).
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