|
04-03-2006, 09:49 PM
|
#1
|
Recycles dryer sheets
Join Date: Mar 2006
Posts: 255
|
Question on the 95% rule
My first posting. I'm 49 and only a couple of years from FIRE. I just got me a copy of Work Less, Live More - great book! Kudos to Bob Clyatt.
I have two questions around the 95% rule in bad years:
1 - The rule is supposed to be "following a bad year" - what constitutes a bad year? A loss? Or something else?
2 - The rule is "you can withdraw at least 95% of the amount you took the previous year". The book doesn't address successive bad years. Does this mean that in bad year #2, you stick to the original 95% value? Or do you take 95% of 95% (which would be 90.25%)?
Thanks for the comments!
|
|
|
|
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!
Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!
You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!
|
Re: Question on the 95% rule
04-04-2006, 05:51 AM
|
#2
|
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Mar 2003
Posts: 18,085
|
Re: Question on the 95% rule
As I understand it:
1. Bad year = your portfolio is lower than it was a year ago.
2. Yup, 95% of 95% of 95% of... in a succession of bad years. You'd have to be prepared to cut a lot of spending or gin up some income in this scenario.
Maybe ESRBob himself will comment, as I think I am a little shaky on #1.
__________________
"All animals are equal, but some animals are more equal than others."
- George Orwell
Ezekiel 23:20
|
|
|
Re: Question on the 95% rule
04-04-2006, 09:18 AM
|
#3
|
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Dec 2003
Location: Losing my whump
Posts: 22,708
|
Re: Question on the 95% rule
#1 - You'll know it when you see it.
__________________
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
|
|
|
Re: Question on the 95% rule
04-04-2006, 10:22 AM
|
#4
|
Moderator Emeritus
Join Date: Dec 2002
Location: Oahu
Posts: 26,860
|
Re: Question on the 95% rule
Welcome to the board, SurfDaddy. I'm not Bob but I've saved one of his PMs that digs into the numbers for my hypothetical series of market returns. I've edited this for brevity & clarity but I've left the numbers alone. So heeeere's Bob:
"If a string of bad years ensues, you would be ratcheting dollars withdrawn down by 5% each year in nominal terms, and therefore also eating inflation (having to make do without inflation adjustments).
The 95% rule historically has rarely kicked in more than a couple years in a row, so while the long multi-year grinding down would be painful, it has rarely happened.
First off, forget inflation in your calculations. My approach just goes with the SWR and the portfolio value.
Start with $1 million. Withdraw 4%, $40k, at the beginning of the year. The market is up 5% that year so $960k grows at 5% to $1,008,000.
2nd year, withdraw 4% of $1,008,000 = $40,320 leaving $967,680. The market grows at 2% through the year to $987,033.
3rd year, withdraw 4% of $987,033 = $39,481, leaving $947,552. The market gets whacked at -5% leaving you with $900,174 at the end of the year.
This is where the 95% rule would kick in for this year: A straight 4% of the $900,174 would be $36,006. Using the 'whichever is greater' approach, calculate that 95% of my last year's withdrawal of $39,481 is greater: it is $37,506. So withdraw that greater amount giving yourself a bit of a break. This guy is busy trying to earn $5k this year, to supplement his gap from $40k, as well as to compensate for four years of inflation that is starting to bite him. But he doesn't mind -- the $5k isn't much and he knows by doing this he is preserving his portfolio's survival rate much more assuredly than if he were gobbling away at his principal in order to provide himself a perfect inflation-adjusted annual spending rate while ruining his long run chances of financial survival.
To finish off that year, he takes $37,506 from $900,174 leaving him with $862,667. The market is up 6% so the portfolio grows to $914,427.
The next year, he takes 4% of $914,427, which is $36,577. This is greater than 95% of $37,506 ($35,630) so he goes with that and keeps his part time job for another year and hopes for one of those nice revert-to-mean years which will bring his portfolio back over the inflation-adjusted $1 million and get him back on track."
Nords here again: The 95% rule executed twice in a row becomes 90.25%, which is a pretty substantial whack, but by the second year it's entirely possible that you've put off the second Caribbean vacation and cut back on other expenses. (And note that the 95% rule might actually give you MORE money than your portfolio's straight 4% withdrawal rate.) Under Bob's system, with two bad years in a row, you might even have gotten a j-j-j-j-job to tide you over. (Sorry, I have a hard time saying that word without stuttering.) The idea is to not ER with such a thinly-capitalized portfolio that you have no room in the budget to cut back (or chase a paycheck) occasionally. Even the most anal retentive analytical of us engineers would add a fudge factor into our ER budget to account for surprises, so that 5-10% budget slack would hopefully ease the pain of having to implement the 95% rule two years in a row.
Now to the important question: Regarding your username, where do you surf?
__________________
*
Co-author (with my daughter) of “Raising Your Money-Savvy Family For Next Generation Financial Independence.”
Author of the book written on E-R.org: "The Military Guide to Financial Independence and Retirement."
I don't spend much time here— please send a PM.
|
|
|
Re: Question on the 95% rule
04-04-2006, 10:33 AM
|
#5
|
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Mar 2003
Posts: 18,085
|
Re: Question on the 95% rule
Quote:
Originally Posted by Nords
Even the most anal retentive analytical of us engineers would add a fudge factor into our ER budget to account for surprises, so that 5-10% budget slack would hopefully ease the pain of having to implement the 95% rule two years in a row.
|
Heheh, I think the actuaries have a better name for it than "fudge factor," which sounds like it has scat implications, now that I think of it. They call it a Provision for Adverse Development, or PAD. So, yes, they PAD their estimates.
__________________
"All animals are equal, but some animals are more equal than others."
- George Orwell
Ezekiel 23:20
|
|
|
Re: Question on the 95% rule
04-04-2006, 10:52 AM
|
#6
|
Thinks s/he gets paid by the post
Join Date: Sep 2005
Posts: 1,677
|
Re: Question on the 95% rule
Thank you for posting that Nords. I thought that's how it worked.
__________________
Dogs aren't our whole lives, but they make our lives whole. - Roger Caras
|
|
|
Re: Question on the 95% rule
04-04-2006, 11:08 AM
|
#7
|
Moderator Emeritus
Join Date: Dec 2002
Location: Oahu
Posts: 26,860
|
Re: Question on the 95% rule
Quote:
Originally Posted by brewer12345
Heheh, I think the actuaries have a better name for it than "fudge factor," which sounds like it has scat implications, now that I think of it.* They call it a Provision for Adverse Development, or PAD.* So, yes, they PAD their estimates.
|
Good one!
"Anal retentive"? "Fudge factor?" I thought that was pretty subtle, but it's nice to have one's work appreciated...
__________________
*
Co-author (with my daughter) of “Raising Your Money-Savvy Family For Next Generation Financial Independence.”
Author of the book written on E-R.org: "The Military Guide to Financial Independence and Retirement."
I don't spend much time here— please send a PM.
|
|
|
Re: Question on the 95% rule
04-04-2006, 12:23 PM
|
#8
|
Recycles dryer sheets
Join Date: Mar 2006
Posts: 255
|
Re: Question on the 95% rule
Now to the important question: Regarding your username, where do you surf
Actually, I surf the net! Never surfed *in the ocean* a day in my life!
I did body surf a few times.
|
|
|
Re: Question on the 95% rule
04-04-2006, 02:54 PM
|
#9
|
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Dec 2003
Location: Losing my whump
Posts: 22,708
|
Re: Question on the 95% rule
Live or dead body you surfed on?
__________________
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
|
|
|
Re: Question on the 95% rule
04-04-2006, 04:17 PM
|
#10
|
Thinks s/he gets paid by the post
Join Date: Mar 2004
Posts: 1,318
|
Re: Question on the 95% rule
Nords,
Thanks for chiming in as I missed this post with my note to you. You guys can PM me if I seem to be missing one of these questions as I get an email from the PM which jolts me to attention when I'm off doing other ER-ish things besides posting here. (Its been a few good days for sculpture, and also, regrettably, for dealing with the silly condo I bought in Toronto where the tenant bailed on me after 5 months and the property manager appears to be comatose by all reliably estimates).
Surfdaddy -- answer your question? Hope you find the book useful overall.
The 95% Rule ain't perfect but its better than having to drop your spending by 20% in a really bad year. A slow squeeze on the belt notches seems better suited to human nature than a major year-on-year jolt, and the data shows it has little negative 'cost' over the long run.
__________________
ER for 10 years; living off 4.3% of savings (and a few book royalties ;-)
|
|
|
|
Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
|
|
Posting Rules
|
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts
HTML code is Off
|
|
|
|
» Recent Threads
|
|
|
|
|
|
|
|
|
|
|
|
|
» Quick Links
|
|
|