Poll:Are You "Probabilistic" School or "Safety First" School?

[Huston55]

When it comes to FIRE withdrawal methods, it seems that most ER.org members belong to the “probabilistic” school versus the “safety first” school of thought. At least that’s what my cursory search/review of past threads indicates. I’d like to expand the discussion on this with a poll of what withdrawal method you use, along with a brief explanation of your choice. For this poll, we will consider a retiree “safety first” if s/he uses guaranteed income streams for at least essential expenses. Also, this is not meant to be a thread on the pros/cons of ‘annuities’, as there are several other ways to provide guaranteed income. [Note: If I’ve missed old threads and this info exists, pls point me to it in your reply but, kindly still take the poll if you will.]

I’ll start with some background on my situation and my current thinking. I FIREd in 2014 with a 60/35/5 (+/-5%) AA; buy and hold low cost MFs/ETFs. I have two small pensions which started @ age 60 (5 yrs ago) and am waiting until ~ age 68-70 to begin SS, at which time I will be 12 yrs +/- into FIRE, and my guaranteed income streams (mostly inflation adjusted) will cover my essential expenses. I started FIRE mostly in the “probabilistic” school but, maintained a ~4 yr CD/STBond ladder to help manage SORR and my psyche. However, as I get closer to the point where guaranteed income streams will cover essential expenses, I find myself becoming more “safety first” school. I know from past threads/polls on SIRE vs FIRE, that it’s easier, and more likely, for one to be in the “safety first” school with enough guaranteed income to be considered SIRE. So, I’m sure that has something to do with my evolution from “probabilistic” into “safety first”, even though <50% of my planned expenses will be met by guaranteed income streams.

I chose #4 in the poll (evolved from probabilistic to safety first) because I value a constant risk of ruin over constant annual spending.

Poll choices:
1. Completely Probabilistic School
2. Probabilistic School but, would be Safety First School if financially possible
3. Completely Safety First School
4. Evolved from one to the other
5. Use a completely different withdrawal method not in either school

 

[Dtail]

I voted for choice #2. If I could be SIRE, I would be. I do trust the calculators calculations based on history mixed in with monte carlo simulation concepts.

 

[Midpack]

We’re about 80% probabilistic but I’m not anxious about being safer or I’d buy annuities or other lower risk incomes sources. My sig line spells out our situation.

 

[Lewis Clark]

I voted "Probabilistic School but, would be Safety First School if financially possible".

Currently, I have a COLA'd pension that covers about half of our essential expenses. When I expect to claim social security at age 70, our combination of pension and social security will cover all essential expenses.

Once we are collecting social security we expect to be living the proverbial three-legged stool of pension, social security and portfolio, with each covering about one third of our total expenses.

 

[geeky_grrl]

I guess I'm 100% probabilistic in your model.

I'm a long ways off from social security and don't have any pensions so I don't have any guaranteed income streams. With inflation risks I don't think most of the guaranteed income streams (annuities, CDs) are necessarily any safer than a balanced portfolio - I'm just trading market risk for inflation risk.

If SS isn't decreased by the time I am 70 I could most manage on it, but it is far enough off I don't trust it.

 

[Major Tom]

100% probabilistic. If I had more money, I'd still be probabilistic, as that would give me an even bigger cushion to weather downturns.

 

[audreyh1]

Since we live off of our investments, and our SS at age 70 will probably mostly go to cover Medicare premiums and taxes, that seems to put us in your probabilistic camp. We’ve just never had guaranteed income streams, and live off withdrawing a small % of our retirement portfolio each year. I guess we are used to it, comfortable with it by now,

 

[Huston55]

We’re about 80% probabilistic but I’m not anxious about being safer or I’d buy annuities or other lower risk incomes sources. My sig line spells out our situation.

Since we live off of our investments, and our SS at age 70 will probably mostly go to cover Medicare premiums and taxes, that seems to put us in your probabilistic camp. We’ve just never had guaranteed income streams, and live off withdrawing a small % of our retirement portfolio each year. I guess we are used to it, comfortable with it by now,

I've read a lot of posts from both of you, and respect your views and approach. So, I'd like to hear more about why each of you chooses to remain in the "probabilistic" school, even though your small WDRs seem to indicate you could "guarantee" essential expenses and still have a sizable remaining "risk" portfolio. Is it just the 'portfolio drag' that comes with the assets assigned to "guaranteed" essential expenses, the current low yield environment or, something else?

 

[RobbieB]

Yup, no pensions for us. Still drawing my deceased wife's SS which covers about 10% of expenses.

 

[foxfirev5]

Old school here. While I have a 2/5/10/20 year plan on the Probabilistic side it is not the end all. The year end portfolio balance is the barometer which guides the plan. As an old boat captain when I see the heavy clouds and the air changing I head to port. It doesn't matter what the weather has done for the last 500 years I know what I know. Call it AA rebalance, market timing or SWR it really doesn't matter all that much. Some get it some never will. Most here have won the game and it's a moot point.

 

[Midpack]

I've read a lot of posts from both of you, and respect your views and approach. So, I'd like to hear more about why each of you chooses to remain in the "probabilistic" school, even though your small WDRs seem to indicate you could "guarantee" essential expenses and still have a sizable remaining "risk" portfolio. Is it just the 'portfolio drag' that comes with the assets assigned to "guarantee" essential expenses, the current low yield environment or, something else?

For me I’d rather have the greater potential upside with little risk of failure than even less risk of failure and less upside potential. I look at my ‘annuitization hurdle’ quarterly and we’re multiples above the threshold. If I ever get anywhere close I can rethink my options. And annuity payouts are at a historic low, so no reason to go there now anyway if you don’t have to.

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=995055

 

[RunningBum]

I'm not sure that the safety first method is a guarantee. I'm not 100% what constitutes a guaranteed flow of income. Is it SS+pension+CD interests+bond interest+dividend interests+annuities? We are edging closer and closer to SS being underfunded where it will have to either be cut and a change made to add funding. I'm not sure how completely PBCG protects your pension so I'll skip over that. CD interest is safe if FDIC or similarly guaranteed, but any that are ending now would have to be rolled into new CDs with minuscule rates if you want to stay with CDs. Bonds can be defaulted on (rarely, but still...), or called early. Dividends can be cut. Annuity insurers can fail.

Once I'm collecting SS and a small pension, I probably will have my needs and many wants covered by so-called guaranteed income, especially if you could interest and dividends within my IRAs. I may even get an SPIA to help with that, but I still have a probabilistic approach and mindset. When I retired nearly 10 years ago it was all based on "I have enough money to last the rest of my life" rather than "I'm generating enough income to cover my expenses for the rest of my life", and my mindset hasn't changed.

 

[RobbieB]

There is no safety and there never was. Safety is an illusion, a mirage.

The rock is ground to sand by the action of waves and wind.

 

[2017ish]

Probalistic, with percentage withdrawal recalculated annually based on portfolio value as of 12/31. If we had sufficient funds to "guarantee" safety first at the present spending level, we'd just spend more.

E.T.A. no pensions and still counting socials as a zero.

 

[Green Papaya]

Probabilistic for me. I am a long way from SS/RMD and have a tiny pension. I use my savings and investment growth to cover living cost, lucky to have sufficient cushion to weather a down market.

 

[Huston55]

I look at my ‘annuitization hurdle’ quarterly and we’re multiples above the threshold. If I ever get anywhere close I can rethink my options.

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=995055

I also use Fullmer's annuitization hurdle concept; it's a good barometer. It's #4 of my backup plans. The first three are: (1) Use cash buffer, (2) Cut expenses, (3) Do consulting work.

ETA: I also use Otar's "Zone" concept but, check that less often than the annuitization hurdle.

 

[Huston55]

Old school here. The year end portfolio balance is the barometer which guides the plan.

Probalistic, with percentage withdrawal recalculated annually based on portfolio value as of 12/31.

Although technically "probabilistic", the "Percentage of Remaining Portfolio" method manages risk better than a straight SWR based on beginning FIRE balance. The links below from Dirk Cotton @ The Retirement Cafe (definitely a Safety First guy) describe withdrawal methods that I find promising. I think the "Dynamic Spending" approach he describes can be applied to an entire portfolio or, to the "risk" portion after essential expenses have been addressed by guaranteed income sources.

The Retirement Café: Dominated Strategies

The Retirement Café: Dominated Strategies and Dynamic Spending)

 

[Out-to-Lunch]

I cannot choose any of your choices.

I would say "Safety first" to cover essential spending, and then probabilistic for anything above that.

 

[audreyh1]

I've read a lot of posts from both of you, and respect your views and approach. So, I'd like to hear more about why each of you chooses to remain in the "probabilistic" school, even though your small WDRs seem to indicate you could "guarantee" essential expenses and still have a sizable remaining "risk" portfolio. Is it just the 'portfolio drag' that comes with the assets assigned to "guaranteed" essential expenses, the current low yield environment or, something else?

Well, our only options for a guaranteed income stream would be to buy some annuities and I think we’re too young to get a decent payout especially for two people, current low interest rates further reduce payout, it would take additional purchases over time to mimic a COLA, we’d be dependent on one or a few insurers for decades, all of a sudden I’ve lost control of big chunks of principal and thus financial flexibility. It’s not appealing at all.

I feel we are well funded (knock on wood). Our portfolio survival probability is very high as we use the %remaining portfolio withdrawal method. We have a lot of flexibility with discretionary spending. We currently underspend our annual withdrawal so we have some short-term funds built up (buffer) that can help smooth income volatility. There may be future large lump sum expenses and we’d like to be able to tap into available principal if needed. BTW I’ve noted some papers recommend annuities as a good idea when someone is marginally funded and not set up to handle SORR. Oh, I see Midpack already mentioned the ‘annuitization hurdle’.

Why don’t I take a completely different approach? I don’t know if anyone can ever completely answer a question like that.

 

[Ronstar]

Currently safety first. Taking SS and 10 years worth of annuity disbursements.

Have never taken money out of IRA. But annuity will run out and RMD's will start in 5-7 years, so I suppose I'll be half safety, half probabilistic at some point.

 

[Badger]

Wife and I both retired about 10 and 9 years ago and have been living on SS and small pensions. I guess that makes us "Safety First". This is only because our modest house is mortgage free, the cars are new and paid for, health insurance is taken care of with Medicare and Tricare, and we are still struggling with trying to emerge from LBYM mentality. The investments have only been used for a few trips, annual max. gifting to grown children, new cars, and donations to select charities. Even so the portfolio is greater now than when we retired.

We are just at a point in life that our interests are simple and inexpensive. My wife likes to play tennis at the public courts and I ride my recumbent trike for our typical daily activities. The investments and cash are there if needed but mostly are there to give us peace of mind and to be financially worry free. If "safety first" was no longer available the investments would take over and we would be fine until well past the "sell by..." date.


Cheers!

 

[gamboolman]

I guess I'm 100% probabilistic in your model.

I'm a long ways off from social security and don't have any pensions so I don't have any guaranteed income streams. With inflation risks I don't think most of the guaranteed income streams (annuities, CDs) are necessarily any safer than a balanced portfolio - I'm just trading market risk for inflation risk.

If SS isn't decreased by the time I am 70 I could most manage on it, but it is far enough off I don't trust it.

What gg said -

ms gamboolgal and I voted 100% Probabilistic in your Poll.

My effective Retirement Date is 1-Feb-21, but I went on Vacation 23-Dec-20 - so I am effectively retired now..... Finally !

I am 61.5 year old and we have about 3 years Expenses in Cash to help us sleep better at night for SORR and riding out the normal Market Gyrations.

Our Portfolio at Vanguard is 50/50 not including the Cash we have sat aside in the Bank and Gun Safe.

Planning to take SS at age 67, but will evaluate as we go along.

gamboolman.....

Lifes A Dance And You Learn As You Go....

 

[DayDreaming]

I've been retired 12 years, living off my savings so I guess that's probabilistic. On Jan 1 I start collecting a pension which will cover 100% of my expenses so I guess that moves into the safety first camp. I could have taken the pension as a pretty nice lump sum, but I preferred the annuity option with a monthly payment - the illusion of safety.

 

[audreyh1]

I've been retired 12 years, living off my savings so I guess that's probabilistic. On Jan 1 I start collecting a pension which will cover 100% of my expenses so I guess that moves into the safety first camp. I could have taken the pension as a pretty nice lump sum, but I preferred the annuity option with a monthly payment - the illusion of safety.

Often people report pension payments offerings that are quite a bit more valuable than what can be bought on the individual annuity market, so it often makes sense to take them with good survivor options.

 

[racy]

Voted 100% Probabilistic: took my pension in a lump sum and never bought, nor plan to buy, an annuity product.

Kitces has an article on this: https://tinyurl.com/okcdqkj

A quote: "Yet the reality is that portfolio-based strategies built around a “conservative enough” safe withdrawal rate effectively are a safety-first approach, while safety-based strategies using annuitization or pensions can still have at least some risk (as evidenced by the history of insurance/annuity company failures, and the growing shortfall of the PBGC in backing failed pensions)."