Safe Withdrawl Rate -- 6%

[Cb]

I think the real value of the Guytron studies is that they demonstrate that a bit of flexibility in one's withdrawals really helps.

SG did similar studies of variable withdrawals using FIREcalc (2% "fixed" + 2% of year end port balance, for instance) by using the Expense Ratio feature. *That study demonstrated the benefits of flexibility.

Gummy has also done studies on what he called "sensible" withdrawal schemes that indicate that flexibility helps a bunch.

Here's a passage taken from a 20 page document I wrote for my wife regarding ER:

"So far I've talked about a consistent, year after year "fixed" rate of withdrawal for our retirement income (the only exception being that each year we'd increase our withdrawal by the rate of inflation for the year past). So even in the event of severe market downturns we'd still withdraw the same amount as the year before, plus a bit more to account for inflation. *Similarly, even after a strong multi-year run-up in our net worth, we'd just take the same amount as the year prior, with only the minor inflation adjustment.

On the other hand, if we were to show a bit of flexibility in our year-to-year withdrawals based on prior-year market performance, adjusting our draw somewhat based on year-end portfolio value, we could either:

- draw a somewhat larger amount right from the outset,

or (my strong preference)

- take the same 4% initial draw, but with a larger margin of safety.

We probably wouldn’t be happy if we allowed our annual draws to track our year-end portfolio value exactly – even if we started out with a 20% higher withdrawal rate, chopping our spending by 20% from one year to the next, or increasing it by 30% from one year to the next (both of which would likely happen 2 - 6 times in the next 55 years) is more variation than we’d like. The 20% down years would be more uncomfortable than we’d like, and spending 30% more in a given year would likely be somewhat wasteful. I think it’d be preferable to allow our annual draw to float only slightly, back and forth about no more than $3000 or $4000 during those more extreme once-every-ten-year market swings.

Our budget is about 50% fixed annual expenses - those that are not optional and really don’t vary, such as property taxes, groceries, health & other insurances, etc. The other 50% are expenses that are more variable in nature…walking around money, remodeling, dining out, music stuff, vacations, etc. *So on the surface it looks as though whatever differences we’d see in our annual expenditures would have to come out of the variable accounts alone. But there’s actually a bit more to it than that…

The good news is that I believe the $3000 - $4000 dollar swings mentioned above would be relatively painless, because many of our expense items are “long-cycle”…things such as car & motorcycle purchases, home remodeling/major repairs, Hawaiian vacations. *We won’t incur those expenses every year. If we simply made an effort to make those expenditures (whenever possible) following good years, we probably wouldn’t have to shave our entertainment, gift, dining out, or golf budgets much during bad years. A business tries to do the same thing…when profits are squeezed they tend to defer major capital equipment expenditures, but they still pay their taxes, etc."

[rmark]

While I expect the future to ryhme, I don't expect it to repeat. The more complicated the withdrawal rules, the more I see data mining. High stock percentages imply an attempt to make up for insufficent funds or to force a result favorable to early retirment .

[Nords]

Quote:

Originally Posted by Soon2B My father died at 79 with over $300K that he never touched.* He worked until he was 65.* He retired with no savings.* He lived off his social security and a postal pension.* He was so afraid of running out of money he never spent or risked any of his cash.* Since it turned out he was investing for his 5 kids, he could have invested more aggressively but I would rather of had him enjoy himself more. How do you start with as high a standard of living as you can that will still allow for a high probability of portfolio survival?

You determine the exact date of your death.* (My spouse tells me that she's working on this part of our retirement planning for me.)* As another poster has mentioned, under that system for some of us the SWR is 20%.

Another option would be to run FIRECalc or a Monte Carlo simulator (they're more conservative than FIRECalc) at an 80% success rate.* Read Bernstein's five-part "Calculator From Hell" series on his website for more on the 80% figure.*

Quote:

Originally Posted by Soon2B The other thing I've seen and I've also seen data to support is the drop off in spending as one ages.* The data says that your spending drops 15% at age 65 and every 5 years thereafter.* The last thing I want is to start retirement eating beans and rice to stay at a 4% WR when at 85 I don't have any desire to spend the fortune I've amassed.

My initial thought upon reading those studies was "good luck with that".* At least one of them didn't account for healthcare inflation & age-related rises in medical costs (like prescriptions).* I think Jarhead could tell us a thing or two about how his spending has remained relatively constant between age 65 & 70, and that's not just from higher greens fees.*

My grandfather's spending declined precipitously in his mid-80s before he spent 14 years in a full-care facility and died just short of age 98.* His entire estate at that point consisted of $60K, a year or two short of Medicaid.* I don't think the SWR concept existed when he retired in the 1970s, but I'm pretty sure that he didn't go wild in his 60s in the comforting knowledge that he could anticipate a swift decline in his 80s.

Quote:

Originally Posted by rmark High stock percentages imply an attempt to make up for insufficent funds or to force a result favorable to early retirment .

A high-stock retirement portfolio can also indicate a govt pension with a COLA, a breathtaking tolerance of volatility, or even a sufficiently large portfolio that can absorb more risk because the SWR is, well, safe.* If you're more concerned about six or eight decades of inflation than you are a little piddling volatility during that period, then you would invest in the only asset class that's reliably beaten inflation.

A high stock portfolio could also be one that's bigger than necessary to support an SWR of less than 4%.* The attitude is "I don't need it all anyway, so why not invest in the next Microsoft".

But it doesn't matter what Bernstein recommends for your asset allocation if you can't sleep at night.

[Yipee-Ki-O]

Quote:

Originally Posted by unclemick2 . . . and changed personal circumstances - up in expensive Yankee land.

Huh? Hey unclemick, that hurts.* Growing up in Missouri in a little town 150 miles south of St Joe, I never considered myself to be a Yankee. Yankee's were a lot further north and east. Maybe I wasn't a southerner, but I wasn't no YANKEE! You're living smack dab in the Midwest!
yko

[unclemick]

Well - you're to talking to an ignorant soul - I was 26 before I realized Southerners weren't from Portland, back east didn't start on the other side of Yakima and Northerners didn't mean Canadian.

heh heh heh heh heh

P.S. Since I'm technically in St Joe city limits - home of the Pony Express and Jesse James museums - can I be a Westerner

[obryanjf]

I'll buy the argument (by Dory I believe) that a simulator based on constant purchasing power versus variable purchasing power is an apples and oranges comparision.

One of my issues with a variable purchasing power calc is I think you need to redefine failure. I coded his system (roughly) and some of the NPV's of the draws as they got adjusted down were 30%, 20% etc. of the inititial draw. Even though the portfolio never technically failed, it does not smell like success to me. I use 50% of initial draw as a failure, in my other simulators.

I like the idea of a couple of simple automatic adjustments (+ or -) after ER rather than a fixed 4%, but have yet to find the right rules. Some adjustments would be closer to mimic what I would want to do if things (portfolio) crashed.

BTW Guyton 6% Inflation Rule rule was eliminated in one of his follow on's in the paper, but I can't find it right now with kids hollowering and jumping around.

job

[sgeeeee]

You can use a 6% initial withdrawal rate and survive 30 years with 97% probability of success. You just can't inflation adjust the entire 6%.

Run Firecalc with a 60/40 portfolio, 30 year duration and a 3% withdrawal rate. I think I assumed short term govt securities. Then go down to the expense ratio box and bump it up to 3.18%.

This corresponds to someone who considers 1/2 their budget requirements to be essential and inflation adjusts them to make sure they have these things covered. They also withdraw 3% of their total portfolio value out each year for discretionary spending. If the portfolio skyrockets, they have a huge discretionary budget. If it tanks, they have less discretionary funds.

The first year in retirement, the withdrawal rate is 6%. After that, it is 3% inflation adjusted plus an amount that depends on portfolio performance.

[dory36]

I'm impressed!*

SGeeeeeeeeeeeeeee has come up with lots of things that the tool will do tnat I never thought of.

[2B]

I'll be impressed when I understand what happened.

If I put $1MM in as the "Starting Portfolio" and 3.18% as the "expenses," I get $29,600 as the starting withdrawl to be 97% "safe." That says that I have a SWR of $29,600 plus I get to take out 3% of my portfolio annually but the $ amount will vary with the size of the portfolio. In good years we travel to Italy and in bad years we don't. The mean inheritance for my children is cut to $1.3MM.

Carrying this forward, adding pensions or social security could then be put in and analyzed as part of the "safe" withdrawl portion that would be included in the inflation adjusted spending rate. The "expenses" could be adjusted to give more or less variable spending.

Is this right? If so, I'm very impressed with sgeeeee's post.

[Cb]

Have a look at this link in which SG describes the study in greater detail:

http://www.s152957355.onlinehome.us/...num=1107790433

Cb

[cute fuzzy bunny]

Quote:

Originally Posted by Cb Have a look at this link in which describes SG's study in greater detail: http://www.s152957355.onlinehome.us/...num=1107790433 Cb

Ick. You made me read something with a ***** post in it :P

"Spidey Sense"

[ronin]

In the current study, Guyton eliminated the 6% inflation cap.* Also the withdrawal rule was modified with an additional stipulation that for a freeze to occur the portfolio had to have a negative yoy total return and the current WD rate has to be greater than the initial rate.* I made 2 spread sheets: 1 w/Guyton's rules and one w/Gummy's "sensible WD" rules and compared performances for various strings of returns.* I'd have to say overall the Guyton rules provide much more stability (less WD variance) at a slightly less cumulative draw, and ends up with more left over in the end.* It's interesting to jigger the initial WD rate down, and see what happens to the frequency of the triggger points too. *Personally, I like the principles involved in Guyton's rules.* Along with the flexiblilty we all would likely have to adjust, there's a lot to consider incorporating into my plan.

[sgeeeee]

Quote:

Originally Posted by dory36 I'm impressed!* SGeeeeeeeeeeeeeee has come up with lots of things that the tool will do tnat I never thought of.

Dory is clearly the kind of guy I wanted to work with back when I had a job. He writes a fantastic program, makes it user friendly, and adds enough options to let you investigate just about anything you can dream of. Then he compliments you for filling in the boxes and pressing the run button.

Thanks for all the work on the program, Dory.

[sgeeeee]

You can also use FIRECalc to explore a spending model that includes regular reductions in spending level through retirement.

http://www.s152957355.onlinehome.us/...1130395938/1#1

[2B]

Hey ronin,

What's the verdict? What would you specifically recommend?

[Jane_Doe]

Quote:

Originally Posted by Soon2B I charged back to FIRECalc and ran the $40,000 withdrawl from $1,000,000 for 40 years with 5 yr treasuries.* That leaves an average residual of $8,266,000 (in today's dollars I think).* That's money I would like to have available to spend. * *

Hi all!

Interesting thread. Always fun to look at different scenarios and analyze different theories, even if I don't always follow it all! :P

Question for Soon2B: I tried to run your FireCalc figures of 40k SWR, 40 yrs on $1 mm port of 100% 5 yr. treasuries. I came up with 52% & 47% success rate (using ppi and cpi, resp.) Not trying to give you a hard time, but what other variables did you come up with to end up with an average of $8+ mm ending balance?

Also, have to agree with YearsToGo about belt and suspenders - our retirement will be entirely dependent upon our investments - no pension and small SS, so I figure very conservatively. For those of you who have pensions, high SS and other sources of income you may be more comfortable taking chances.

Another interesting note regarding ups and downs on spending - after 25 years of a flexible income (self-employed, husband had a small construction business), I can attest to the fact that it is just simple human nature to put off expenditures in lean years and spend extra, or buy those things that you put on hold, in the "fat" years. Easier than you think, really.

Printed out the whole Guyton article but haven't read it thru yet - probably will work wonders on putting me to sleep tonight!!

Have a great day!

Jane

[2B]

When I ran the case I used 60% stocks and not 100% bonds. The 60/40 split was based an earlier post by sgeee. I can see where you got the 100% 5 yr treasuries. I wasn't complete in my description.

Quote:

Originally Posted by sgeeeee You can use a 6% initial withdrawal rate and survive 30 years with 97% probability of success. You just can't inflation adjust the entire 6%. Run Firecalc with a 60/40 portfolio, 30 year duration and a 3% withdrawal rate. I think I assumed short term govt securities. Then go down to the expense ratio box and bump it up to 3.18%.

[samclem]

To second rmark's observation--the complex rules look like an artifact of data mining. Any scheme to determine a withdrawal method/amount should result in general, simple guidelines since there's no precise future data to go on. Highly specific rules imply a degree of precision in our understanding of future conditions (asset class returns, inflation, etc) that is unwarranted (IMO).

Gummy's approach looks right to me.

samclem

[sgeeeee]

I think some people take the spending models too literal. I would be surprised if anyone actually uses a 4% withdrawal adjusted for inflation each year. It doesn't make sense. One year you have to re-roof the house, one year you have to trade cars, one year the air-conditioner goes out. . . Those kinds of occasional, unpredictable expenses cause fluctuations in spending that keep you from using a rigid budget -- even if you had nerves of steel during prolonged market declines.

But spending is the most powerful weapon in your retirement survival arsenal. Running simulations that look at different spending models can give you a good feel for how much you can gain by using different spending approaches. You can look at 1) inflation adjusted spending, 2) strict percentage of the portfolio spending, and 3) a mix of the two using FIRECalc. If you use the withdrawal change options, you can even look at declining or increasing spending models.

Real life will only approximate these models, but the results are still instructive.

[retire@40]

Quote:

Originally Posted by sgeeeee I think some people take the spending models too literal.* I would be surprised if anyone actually uses a 4% withdrawal adjusted for inflation each year.* It doesn't make sense.* One year you have to re-roof the house, one year you have to trade cars, one year the air-conditioner goes out. . .* *Those kinds of occasional, unpredictable expenses cause fluctuations in spending that keep you from using a rigid budget -- even if you had nerves of steel during prolonged market declines.

That's why you build into your budget an allocation for those types of expenses so it can be part of your 4% SWR.