Smart guys question 4% SWR strategy

[clifp]

I didn't read the whole thing, just the excerpts provided above, but I interpret this to mean....

that at the end of 30 years of a 'guranteed' 4.46% SWR, you are also 'guaranteed' to have zero dollars left.

Is that correct? That is how I interpret 'never has a surplus'. If you assume a fixed % return (I don't know how he predicts future returns, or does he just buy 30 year bonds?), you can simply self-annuitize that over 30 years. Is that what the article is saying?

Fine approach - at the same time I can call and have my gravestone carved at today's wages with the year '2038' on it.

edit/add:

OK, I can go plug that into a SS, but 4.46% sounds right if you self-annuitize and assume a 2% real return.

-ERD50

Ah I am glad somebody else caught that. Yes the zero risk portfolio (which contains non-existent 2% TIP short-term bonds) is guaranteed to have zero dollars after 30 years. Clearly the world of financial planning would be vastly simpler if we all agree to check out 30 years after retiring.

I think I am going to start a retirement financial firm called Logan's Run, which will offer 5%+ withdrawals, with a small catch. (Hopefully Chris Wallace will have left Dateline in the next 30 years, before my client discover the catch!).

An interesting article. It is hard argue with his premise that if you'd be happy to see Dylan in concert, it is crazy to take so much risk that you have decent chance of only seeing it on Pay for View.

Still I think by focusing on a fixed length of time, he is really missing the boat on making this applicable to real retirees.

 

[Notmuchlonger]

ALRIGHT clifp! Logan's Run reference!

 

[cute fuzzy bunny]

Yep, I love the plans that try to leave you with a reliable zero portfolio at the end. Nice plan, but you do have to die on schedule.

Also regularly interested in the plans where people cant stomach the idea of leaving money behind in their estate, so they elect to give it to an insurance company in return for reliable but sub-par returns.

Still no free lunches in sight.

 

[dbr]

Ah I am glad somebody else caught that. Yes the zero risk portfolio (which contains non-existent 2% TIP short-term bonds) is guaranteed to have zero dollars after 30 years. Clearly the world of financial planning would be vastly simpler if we all agree to check out 30 years after retiring.

I think I am going to start a retirement financial firm called Logan's Run, which will offer 5%+ withdrawals, with a small catch. (Hopefully Chris Wallace will have left Dateline in the next 30 years, before my client discover the catch!).

An interesting article. It is hard argue with his premise that if you'd be happy to see Dylan in concert, it is crazy to take so much risk that you have decent chance of only seeing it on Pay for View.

Still I think by focusing on a fixed length of time, he is really missing the boat on making this applicable to real retirees.

To the extent that the retirement is annuitized having no wealth is not the same as having no income. The perspective of the paper is that dying with wealth means you used your money inefficiently. The trick, as one says, is how to die without money but also make sure you don't live without income. It is fascinating that in an age where the demise of the defined benefit pension, especially the gold plated COLA's ones including Social Security, is universally lamented, that the idea of ending up in the same situation where we have income but no wealth is considered a fate worse than death.

 

[haha]

It is fascinating that in an age where the demise of the defined benefit pension, especially the gold plated COLA's ones including Social Security, is universally lamented, that the idea of ending up in the same situation where we have income but no wealth is considered a fate worse than death.

Like Uncle Mick says, it's all hormones. On a pension, you are a pensioner.

With assets you are Daddy Cool.

Ha

 

[Hamlet]

I think there is a basic problem with this article's premise. They are assuming that any "surplus" has no value to the retiree.

I think a lot of people put some value on leaving some money to their children or favorite charities. So that surplus has at least some value to some people.

 

[RunningBum]

I think there is a basic problem with this article's premise. They are assuming that any "surplus" has no value to the retiree.

I think a lot of people put some value on leaving some money to their children or favorite charities. So that surplus has at least some value to some people.

It also has value if you live longer than expected.

 

[yakers]

And TIPS ladders? Isn't harping on TIPS ladders what got Rob Bennet subjected to nasty personal attacks and ultimately banned?

For the first year that I posted on here I wrote long pieces explaining why I thought that the 4% rule underestimated risk, given volatile portfolios.

Ha[/COLOR]

No, TIPS ladders and other questions about the 4% rate is not what got rob/HoCu$ tossed off many, many web boards. It was being a disruptive troll. You probably know that. Plenty of ways to engage with the 4% issue, a diehards poster bob90245 has a lot about the subject Retire at the Pie Shop
Now if someone had loaded up on ibonds when they were first issued,they would be in as good a position as a COLAd pension.

 

[teejayevans]

I subscribe to the "three buckets" approach to retirement financing:

1. Bucket #1 (cash) -- Enough cash to pay the next year or two of living expenses. This lets you sleep well at night.
2. Bucket #2 (income) -- Dependable income sources such as pensions, social security, and high-quality bonds and dividend-paying stocks. You own these assets for the dependable income they provide so that it helps to restore the cash you need in bucket #1.
3. Bucket #3 (appreciation) -- A diversified portfolio of stocks and other investments that are expected to appreciate over the long term, but may be highly volatile over the short term of a few years. The 4% safe withdrawal rate applies to this bucket, so when there are a few lean years, the other two buckets pick up the slack.

When you do withdraw from bucket #3 (volatile appreciation assets), add the amounts to bucket #1 (cash) to restore its balance to a year or two of living expenses; otherwise, use the money to buy more assets in bucket #2 (dependable income assets).

Ditto, because with their model, 60/40 split they are taking money out
in down market, because you some money in cash, you don't have to do
that. Your bucket 1 only has 2 years worth, that wouldn't be enough
back in the 2000-2002 bear market. I would want at least 5 years worth.
TJ

 

[ESRBob]

I like the 'Modified 4% Rule' -- take 4% of your portfolio value every year and live on that. That way you'll be making annual adjustments -- both up and down. Almost like saying "Every Year is Year 1". If you operate that way, you're guaranteed to never run out of money (As some wags have noted, 4% of your last dollar still leaves you with 96 cents...)

Seriously, the data on this method suggest that compared to the original 4% Rule, you'll take out as much or more withdrawals over the long run, with a far higher portfolio survival record -- survival being defined as keeping up the real value of the portfolio over time, which also means your inflation-adjusted level of income stays up, and you'll still have your money. The only hard part is during down years when you need to tighten your belt. But since everyone else will be also, it might not feel so hard.

 

[haha]

No, TIPS ladders and other questions about the 4% rate is not what got rob/HoCu$ tossed off many, many web boards. It was being a disruptive troll. You probably know that. Plenty of ways to engage with the 4% issue, a diehards poster bob90245 has a lot about the subject Retire at the Pie Shop
Now if someone had loaded up on ibonds when they were first issued,they would be in as good a position as a COLAd pension.

Well, I've been around here long time, and it appears to me that a so-called troll is often just someone who keeps bringing up topics that are dismissed by the majority, or by the majority of the vocal.

I appreciate your link to threads on this topic of funding invariable demands with variable return instruments. I am not familiar with other boards, except those devoted to individual stocks or industries. One board is likely enough for me.

I have seen posters told "You have nice life now" for nothing more offensive than holding a different idea, and not shutting up about their different idea when chastised by their betters.

Since we really don't know what will turn out to be right or wrong, I think I often would rather hear what these mavericks have to say, even if they can be annoying in the way that they say it.

Anyway, I referred to this Bennet situation in response to Doc's post about Sharpe's paper. As some noted, I was attempting a little exaggeration as humor. I guess it didn't work, or at least didn't work for you.

I did read the paper, pointed out the outdated yield assumptions, and others pointed out the 30 year horizon. In the context of the paper that is actually not a very big deal, as they were using a 65 year old as the example. Not nothing, but maybe not of overwhelming importance.

Something of perhaps greater meaning is that in a world of real interest rates between 0.5 and 1.5%, it takes a lot of faith to expect historic returns in the equity markets. But hey, everyone chooses his own uncertainties, the ones he is aware of and the ones he isn't. As the man said, "You pays your money and you takes your chances."

Nevertheless, it remains true that a very similar idea was presented, years ago, by Rob Bennet, and regardless of why he may have been banned, it would have been a quite respectable way to invest since then.

I read above that he has had financial difficulty. If Rob got into trouble financially it was because he foolishly thought he was a writer, and because he quit work quite young, severely undercapitalized, and as I remember with children. ER is not tolerant of stupidity.

You may be aware of a strong trend toward retirement conservatism on this board of late. Partly I think because there are more well-capitalized people posting. But it wasn't always so. A sometimes easy way to get on the wrong side of the Politburo was to point out to hopeful but marginal retirees that what they needed was not some sort of technical magic, but the awareness that they were severely undercapitalized.

Some people seem to have LBYM magic, but most, especially parents of young children should probably not rely on experiencing those magic results themselves.

Ha

 

[REWahoo]

Ha, as old Ronnie was fond of saying, "Well, there you go again..."

 

[haha]

Ha, as old Ronnie was fond of saying, "Well, there you go again..."

LOL!

 

[Martha]

Man, I love you guys.

 

[walkinwood]

I did some simple calculations using the PMT function- yes, at a 2% real return, in 30 years, you'd be left with nothing at the 4.46% withdrawal. That would equate to worst case for the 4% SWR using Bengen's calculations.

But, this is an ER forum so you need to take more than 30 years into account. I calculated for 40 years - 3.655%, for 50 years - 3.182%. And then there are the practical issues as others have pointed out.

Through his example, I understand his points that the 4% SWR method causes you to leave money on the table (he refers to it as paying a surplus), can be replicated for less (how?), and if the preferences of the retiree are known, can probably be done for even less (again how?).

But he lost me after that. What do we do about it? Also his example of a single 30 year period left me cold - that's our most important and least controllable variable - our lifespan!

Are there some mathematicians here who could simplify his math for us?

 

[cute fuzzy bunny]

So far I've never seen anyone with a different idea, backed up by actual data, be called a troll or told to "have a nice life".

Once again I'm forced to ask how the "vocal majority" manages this task of having a collective opinion on any topic when we all invest differently, withdraw differently, spend our money differently, have different political/social opinions and live in different parts of the country. Jeez louise...about the only thing a lot of us have in common is that we dont take "get rich quick" bait easily and we all show up here on a regular basis.

Heck Ha, you're about as different from the alleged "norm" as anyone, yet we somehow dont give you any more crap than you fully deserve, eh?

 

[Rich_by_the_Bay]

I like the 'Modified 4% Rule' -- take 4% of your portfolio value every year and live on that. That way you'll be making annual adjustments -- both up and down. Almost like saying "Every Year is Year 1". If you operate that way, you're guaranteed to never run out of money (As some wags have noted, 4% of your last dollar still leaves you with 96 cents...)

Seriously, the data on this method suggest that compared to the original 4% Rule, you'll take out as much or more withdrawals over the long run, with a far higher portfolio survival record -- survival being defined as keeping up the real value of the portfolio over time, which also means your inflation-adjusted level of income stays up, and you'll still have your money. The only hard part is during down years when you need to tighten your belt. But since everyone else will be also, it might not feel so hard.

Thanks, Bob. Are you no longer advising the 95% floor rule? I'm surprised you didn't include it in the above.

 

[haha]

Heck Ha, you're about as different from the alleged "norm" as anyone, yet we somehow dont give you any more crap than you fully deserve, eh?

Maybe even less than I deserve?

Ha

 

[samclem]

I like the 'Modified 4% Rule' -- take 4% of your portfolio value every year and live on that. That way you'll be making annual adjustments -- both up and down. Almost like saying "Every Year is Year 1". If you operate that way, you're guaranteed to never run out of money (As some wags have noted, 4% of your last dollar still leaves you with 96 cents...)

Seriously, the data on this method suggest that compared to the original 4% Rule, you'll take out as much or more withdrawals over the long run, with a far higher portfolio survival record -- survival being defined as keeping up the real value of the portfolio over time, which also means your inflation-adjusted level of income stays up, and you'll still have your money. The only hard part is during down years when you need to tighten your belt. But since everyone else will be also, it might not feel so hard.

Yep, that's what I plan to do. If the income volatility is too much for some people, the slight modifications proposed in "Work Less, Live More" (taking no less than 95% of the prior year's allotment, etc) can help buffer things. But I'd rather let my portfolio's performance dictate a cap on my spending rather than increasing spending for an inflation adjustment that is totally disconnected from my portfolio's value. That observation of the article (that there is considerable risk in using a fixed withdrawal strategy fed by a highly variable portfolio) seems important and worthwhile--even if it's already been said many times.

 

[ESRBob]

Thanks, Bob. Are you no longer advising the 95% floor rule? I'm surprised you didn't include it in the above.

I fully stand behind it. Just didn't want to overload the post. (I think the thread is probably more interested in troll etiquette at this late stage).

For those not familiar with it, I did extensive historical research on a '95% Rule' which says that even in years when the market value of your portfolio falls more than 5%, you can still take your withdrawal as if the market had only fallen 5%, that is to say, you can take 95% of the withdrawal you had the year before, so you don't have to fully adjust to steeper market declines. The 'cost' in terms of portfolio survival to this strategy over the historical periods studied (1926 to present) was de minimus.

Thus the Modified 4% Rule combined with the 95% Rule gives a high degree of financial safety over the very long term and a sensible withdrawal -- managable in bad times and allowing for lifestyle improvements if times are good.

The thing I never liked about the Traditional 4% Rule aside from the obvious tendency to leave people broke after 30 years is that if times are good, you're still plugging away on the same inflation-adjusted income you had, while your cash is piling up. That would bug me -- I like to spend money if it's coming in. I want something that is safe, but not Puritanical.

Not for everybody, but it works well for me and a growing number of others. It's actually based on the way foundations operate -- not something I invented, just picked up and adapted. Foundations have to operate in perpetuity, and strike a fair balance of what they call inter-generational equity -- the needs of todays grant recipients vs the needs of the future's grant recipients, given uncertain market returns in the foundation's portfolio. Long term retirees are kind of the same -- balancing out today's withdrawals against the future's withdrawals in the face of uncertain market returns.

 

[ERD50]

I did some simple calculations using the PMT function- yes, at a 2% real return, in 30 years, you'd be left with nothing at the 4.46% withdrawal.

I plugged the numbers into a SS and got the same thing - out of money at year 30.

But he lost me after that. What do we do about it? Also his example of a single 30 year period left me cold - that's our most important and least controllable variable - our lifespan!

I just skimmed, but I don't think the author ever mentions *early* retirement. I saw 65 YO a few times, so 30 years puts you in the poor house at 95 YO. For a couple, each 65, the male has a 6% chance of making that age, the female a 13% chance, and one of them an 18% chance. That's a form of risk that I think he does not address.

https://personal.vanguard.com/us/planningeducation/retirement/PEdRetPicLongRetireContent.jsp

-ERD50

 

[cute fuzzy bunny]

Maybe even less than I deserve?

MUCH less. Cuz we LOVE YOU MAN!

Now lighten up, Francis.

 

[youbet]

I like the 'Modified 4% Rule' -- take 4% of your portfolio value every year and live on that. That way you'll be making annual adjustments -- both up and down. Almost like saying "Every Year is Year 1". If you operate that way, you're guaranteed to never run out of money (As some wags have noted, 4% of your last dollar still leaves you with 96 cents...)

Seriously, the data on this method suggest that compared to the original 4% Rule, you'll take out as much or more withdrawals over the long run, with a far higher portfolio survival record -- survival being defined as keeping up the real value of the portfolio over time, which also means your inflation-adjusted level of income stays up, and you'll still have your money. The only hard part is during down years when you need to tighten your belt. But since everyone else will be also, it might not feel so hard.

Bob, with this guideline, how would I determine how big my portfolio needs to be for me to RE? Say I'm anxious to RE for reasons important to me and I determine I can get by on $30k/yr (real), but that is a tight budget with no extras. Would 25X that ($750K) be enough? Or would I need to work longer and save more so that in years when the portfolio is down I still had the needed $30K?

 

[youbet]

Ditto, because with their model, 60/40 split they are taking money out
in down market, because you some money in cash, you don't have to do
that

That's not really true TJ. You can manage your portfolio in the equity %/fixed%/cash% format and carry several years worth of cash just as easily as managing your portfolio in a bucket 1/bucket2/bucket 3 format and carry several years of cash. Just different jargon. Cash is cash whether you keep it in the cash line of a spreadsheet or a "bucket."

 

[rogersteciak]

For those not familiar with it, I did extensive historical research on a '95% Rule' which says that even in years when the market value of your portfolio falls more than 5%, you can still take your withdrawal as if the market had only fallen 5%, that is to say, you can take 95% of the withdrawal you had the year before, so you don't have to fully adjust to steeper market declines. The 'cost' in terms of portfolio survival to this strategy over the historical periods studied (1926 to present) was de minimus.

Did your study include just the U.S. stock market or all of the world stock markets?

The reason I'm asking is I just read Wealth, War and Wisdom by Barton Biggs. While the book is controversial, one of the author's points is that at least once in every century, there has been an episode where the Four Horseman of the Apocalypse (pestilence, war, famine, and death) cause massive wealth destruction somewhere on the planet. The author uses World War II as a case study, which has been the greatest destroyer of wealth to date, and this event affected Europe and Asia much more than it affected the United States.

But it could be our turn next time and the it may not be war. I realize all bets are off if it's a full apocalyptic event (although SARS didn't happen in 2006, for example, it could still happen at some point in the future). But maybe whatever happens will be a relatively minor event as apocalypses go. My point is that what has happened in the U.S. stock market since 1926 may not be representative of what happens in the future (a similar concept of "a once in 500 years event" is discussed in The Black Swan by Nassim Taleb). The U.S. stock market was closed for a few days after 9/11/2001 and for a few months during World War I, for example, but other stock markets have been closed for several years while a major war was happening.

I'm not sure how one can really prepare for black swans (or events that take on apocalyptic proportions), but I believe it makes sense to think through the possibilities. I've lived within 20 miles of some of the most dangerous earthquake faults in California for the past 35 years and although I don't know when or how big the next one will be, there are certain things I can do ahead of time to be somewhat prepared for The Big One when it occurs. These preparations don't guarantee I will emerge whole, but they will likely mitigate much of the damage I might suffer. I believe a similar analysis would be useful when trying to calculate the size of an investment portfolio to be used for FIRE, and knowing how some of the non-U.S. stock markets have performed in the past might be helpful in this analysis.