Join Early Retirement Today
Reply
 
Thread Tools Display Modes
Old 08-25-2014, 03:01 PM   #41
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Feb 2013
Posts: 9,358
Quote:
Originally Posted by Animorph View Post
Yeah, I remember doing an Excel spreadsheet for an annuity that matched the 4% WR, roughly 1.5% real return. One big problem is that it leaves you with $0 after 30 years. Guaranteed. No way I'm planning for that. Though if you made it for the thirty years you definitely wouldn't die rich.

I much prefer to take 4% and die rich.
The LPM model works best for people who have enough assets or other income sources and are willing to settle for low returns, like those who can live off pensions / SS / rental income / 1% of portfolio and maybe have large home equity or other assets. You don't necessarily have to spend your portfolio to zero to follow a LPM strategy.

From the articles I have read, I think Bill Bernstein felt bad when a lot of his clients had already won the game and were still taking risks when they might have slept better just hanging on to what they had, instead of shooting for more money when they had a lower risk tolerance than many here and were already multimillionaires. YMMV.
daylatedollarshort is offline   Reply With Quote
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!

Old 08-25-2014, 03:10 PM   #42
Thinks s/he gets paid by the post
 
Join Date: Jan 2008
Posts: 1,495
Quote:
Originally Posted by kramer View Post
Yes, but you are just as likely to live longer than the median longevity. These possibilities cancel each other out surprisingly well.
No they necesarily don't. Read Scott Burns blog as well as Dirk Cottens blog for good discussions on spending patterns in retirement and longetivity:

Scott Burns - AssetBuilder Inc., Registered Investment Advisor

The Retirement Cafe
Options is offline   Reply With Quote
Old 08-25-2014, 03:32 PM   #43
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
youbet's Avatar
 
Join Date: Mar 2005
Location: Chicago
Posts: 13,151
Quote:
Originally Posted by Quantum Sufficit View Post
I am planning to retire around October 2015. I was planning to withdraw 3 to 3.5% of my stash per year. I know what recent studies have suggested (going lower) but its getting a bit on the ridiculous side from my perspective. I was thinking that 2.2M divided by 35 years is 62857 per year. I currently can live on less and at a rate of return of 0% is a 2.857% swr. What would you do here? Thanks. If we assume a 2% rate of return annually (which I feel is very conservative with a 60/40 portfolio.
QUANTUM
The important issue isn't so much the investment returns you assume but the inflation rate.

When testing for inflation, try not to use some average per year figure. Rather, use a high number early on followed by lower numbers later. For example, 6% inflation for the first decade of your retirement followed by 2% for the remainder.

If you get through that with your 0% or 2% investment returns, you're in fine shape, IMHO.
__________________
"I wasn't born blue blood. I was born blue-collar." John Wort Hannam
youbet is offline   Reply With Quote
Old 08-25-2014, 06:34 PM   #44
Recycles dryer sheets
galeno's Avatar
 
Join Date: Nov 2002
Location: Alajuela, Costa Rica
Posts: 222
Correctomundo! I'd even say the only difference between a 80 to 100% AWR is how much money do you wish to leave your heirs?

Quote:
Originally Posted by TimSF View Post
I am planning based on a 3.5% withdrawal over 40 years. The difference between 95% and 85% FIREcalc success rate is negligible to me.
__________________
KISS & STC.
galeno is offline   Reply With Quote
Old 08-25-2014, 06:53 PM   #45
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Sep 2005
Location: Northern IL
Posts: 26,821
Quote:
Originally Posted by galeno View Post
Correctomundo! I'd even say the only difference between a 80 to 100% AWR is how much money do you wish to leave your heirs?
If that is what you say (assuming 'AWR' refers to 'success rate'?), then I say you have not studied the output of a historical report like FIRECalc.

Even the 100% success rate does not assure leaving money to heirs, the marginally 100% success rate drops to ~ $0 in at least one case. And of course, the future could be worse than the past, so you might want some buffer in there.

If the future is similar to the past, what is your plan if the 1 in 5 scenario comes along, and you run out of funds? Wouldn't that be different than not running out of funds?

-ERD50
ERD50 is offline   Reply With Quote
Old 08-25-2014, 07:15 PM   #46
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Sep 2012
Location: Seattle
Posts: 6,008
Who really runs out of funds though? Especially someone who has spent loads of time on ER.org.

You might run out of funds if you develop a very bad chronic medical condition that doesn't kill you but is a huge resource drain. I contend that it would be hard to prevent all cases of this with almost any reasonable portfolio or SWR.

The more realistic scenario of running out of funds by overspending when the market is down just isn't going to happen for most of the people on this forum. When they see their portfolio drop by 50%, they are not going to schedule 3 Europe vacations over the next year. They might buy ground beef instead of $22/lb Angus ribeye.
Fermion is online now   Reply With Quote
Old 08-26-2014, 01:52 AM   #47
Thinks s/he gets paid by the post
 
Join Date: Jun 2005
Posts: 1,183
Quote:
Originally Posted by Options View Post
No they necesarily don't. Read Scott Burns blog as well as Dirk Cottens blog for good discussions on spending patterns in retirement and longetivity:

Scott Burns - AssetBuilder Inc., Registered Investment Advisor

The Retirement Cafe
You will need to be more specific than that. Any reference to a specific blog entry or article?
kramer is offline   Reply With Quote
Old 08-26-2014, 05:25 AM   #48
Thinks s/he gets paid by the post
FIRE'd@51's Avatar
 
Join Date: Aug 2006
Posts: 2,433
Quote:
Originally Posted by daylatedollarshort View Post
I think the point of what the LPM financial writers are saying if you even get a 0 real return (all but 5 year TIPS):

100% / 25 years = 4% SWR
100% / 30 years = 3.33% SWR
100% / 50 years = 2% SWR

with no worries about bear markets or sequence of returns risk. Any real return above zero is in addition to that:
Actually, I believe these results require a flat TIPS yield curve in addition to a 0% real YTM.
__________________
I'd rather be governed by the first one hundred names in the telephone book than the Harvard faculty - William F. Buckley
FIRE'd@51 is offline   Reply With Quote
Old 08-26-2014, 07:41 AM   #49
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
ziggy29's Avatar
 
Join Date: Oct 2005
Location: North Oregon Coast
Posts: 16,483
Quote:
Originally Posted by daylatedollarshort View Post
I think the point of what the LPM financial writers are saying if you even get a 0 real return (all but 5 year TIPS):

100% / 25 years = 4% SWR
100% / 30 years = 3.33% SWR
100% / 50 years = 2% SWR
This (as mentioned) assumes a zero real return. It also assumes that you aren't interested in passing leaving an estate behind to heirs. Frankly, if I saw my portfolio balance shrinking every year, I'd get really nervous. I'd expect it sometimes in weak years for the market but if it happened year after year without fail I'd get real paranoid real fast.

In reality I think someone age 65 and higher can get away with 4% pretty easily with a moderate allocation (say 40-60% equities earning perhaps a 3% long term real return), and as you start the withdrawals at a younger age, it gradually reduces but eventually the curve would likely flatten between 2.5% and 3%, meaning that would be the rate you could withdraw indefinitely. Sure, at some point the longer you do this the greater a chance of a "black swan" event we've never seen before, but that would likely threaten the entire economic system no matter how defensively allocated you may be.
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)
ziggy29 is offline   Reply With Quote
Old 08-26-2014, 08:35 AM   #50
Thinks s/he gets paid by the post
GTFan's Avatar
 
Join Date: Apr 2013
Location: Ormond Beach
Posts: 1,407
Quote:
Originally Posted by daylatedollarshort View Post
The LPM model works best for people who have enough assets or other income sources and are willing to settle for low returns, like those who can live off pensions / SS / rental income / 1% of portfolio and maybe have large home equity or other assets. You don't necessarily have to spend your portfolio to zero to follow a LPM strategy.

From the articles I have read, I think Bill Bernstein felt bad when a lot of his clients had already won the game and were still taking risks when they might have slept better just hanging on to what they had, instead of shooting for more money when they had a lower risk tolerance than many here and were already multimillionaires. YMMV.
But the problem here for us mortals is how do you define having 'won the game', especially given the longer periods that we're playing it? I wouldn't say that I've done so even though I'm over $1.4 mil now, because I'll only be 51 at retirement end of this year. There's lots of game still left (I hope), so I won't be cashing out all my chips for an LPM port.

And I agree, for those of us not living off of pensions and having quite a few years left before drawing FRA SS, it makes even less sense to go this route.
GTFan is offline   Reply With Quote
Old 08-26-2014, 08:42 AM   #51
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Feb 2013
Posts: 9,358
Quote:
Originally Posted by FIRE'd@51 View Post
Actually, I believe these results require a flat TIPS yield curve in addition to a 0% real YTM.
A yield greater than 0 real increases these SWR higher, per the TIPS links previously posted. With a zero real yield, you'd just divide your beginning portfolio / years of retirement = SWR.

$100 beginning portfolio / 50 years = you can take out $2 a year.

100/50 =2.
1,000,000 / 50 = 20,000.

For a couple, annually this could mean:

$20K SWR ($1M portfolio, 0 real return, 50 year horizon) + $24K SS + $14K rental income = $58K retirement spending.

At age 90 annuities are pretty cheap or maybe the hypothetical couple in the above example has a $500K house for a reverse mortgage, to avoid depleting the portfolio to zero.

Instead of firecalc, you can just use a spreadsheet with inflation and real return as parameters to model your retirement planning under this methodology.
daylatedollarshort is offline   Reply With Quote
Old 08-26-2014, 08:56 AM   #52
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Feb 2013
Posts: 9,358
Quote:
Originally Posted by GTFan View Post
But the problem here for us mortals is how do you define having 'won the game', especially given the longer periods that we're playing it? I wouldn't say that I've done so even though I'm over $1.4 mil now, because I'll only be 51 at retirement end of this year. There's lots of game still left (I hope), so I won't be cashing out all my chips for an LPM port.

And I agree, for those of us not living off of pensions and having quite a few years left before drawing FRA SS, it makes even less sense to go this route.
I believe your choices are - lower your expenses, work longer, work part-time, develop other retirement income streams or stick with a higher potential return methodology. However, as someone on Bogleheads pointed out once in a thread, historically a certain percent of the time, maybe 10%, stocks do not return more than bonds for extended periods, so even under the 3 fund approach what would you do in that case? Don't you have to have a retirement plan in place to live off a bond return type portfolio either methodology you choose, because maybe 10% of the time that is what is going to happen anyway?
daylatedollarshort is offline   Reply With Quote
Old 08-26-2014, 09:07 AM   #53
Thinks s/he gets paid by the post
GTFan's Avatar
 
Join Date: Apr 2013
Location: Ormond Beach
Posts: 1,407
No way, and you didn't answer my question anyway - you can't define 'won the game' for the lesser ER mortals here that don't have multimillion ports. That's what this strategy is based on, and IMO it requires much more money than most of us have or you have to have other streams of income and/or be a fairly extreme LBYM'er. Not to mention that if you're already in a balanced AA with a lot of taxable it can take years to migrate to some sort of LPM port, and then you have all the tax implications.

There's no way I'm going solely with bonds, especially in the current environment we're in (which is essentially the 10% worst case for bonds right now). But that's just me.
GTFan is offline   Reply With Quote
Old 08-26-2014, 09:11 AM   #54
Administrator
MichaelB's Avatar
 
Join Date: Jan 2008
Location: Chicagoland
Posts: 40,589
Quote:
Originally Posted by daylatedollarshort View Post

For a couple, annually this could mean:

$20K SWR ($1M portfolio, 0 real return, 50 year horizon) + $24K SS + $14K rental income = $58K retirement spending.
Taxes must be added to this equation. This is not trivial because the ratio of the real rate divided by the nominal rate must be equal to or greater than the marginal tax rate for the life of the portfolio. Once that ratio fails the portfolio withdrawal permanently loses purchasing power.
MichaelB is online now   Reply With Quote
Old 08-26-2014, 09:40 AM   #55
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Feb 2013
Posts: 9,358
Quote:
Originally Posted by MichaelB View Post
Taxes must be added to this equation. This is not trivial because the ratio of the real rate divided by the nominal rate must be equal to or greater than the marginal tax rate for the life of the portfolio. Once that ratio fails the portfolio withdrawal permanently loses purchasing power.
If you are using TIPS they work best held in retirement accounts because of the phantom interest issue. Bodie recommends TIPS in retirement accounts. From what I have read Bernstein just leaves it as a general framework with "safe assets" with TIPS as one option. I don't know of anyone who advocates TIPS for taxable accounts.

It is true you don't have the zero tax on capital gains with this approach. It is one of the cons of the pros and cons compared to other methodologies, though some may have other ways to pay low or zero taxes.
daylatedollarshort is offline   Reply With Quote
Old 08-26-2014, 10:06 AM   #56
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Feb 2013
Posts: 9,358
Quote:
Originally Posted by GTFan View Post
No way, and you didn't answer my question anyway - you can't define 'won the game' for the lesser ER mortals here that don't have multimillion ports. That's what this strategy is based on, and IMO it requires much more money than most of us have or you have to have other streams of income and/or be a fairly extreme LBYM'er. Not to mention that if you're already in a balanced AA with a lot of taxable it can take years to migrate to some sort of LPM port, and then you have all the tax implications.

There's no way I'm going solely with bonds, especially in the current environment we're in (which is essentially the 10% worst case for bonds right now). But that's just me.
Won the game per the BB definition is to take risk off the table by covering your baseline expenses with safe assets, so at least you don't end up with a shopping cart under an overpass in your old age.

Discussion of your points, and pros and cons, here:

William Bernstein - The worst retirement investing mistake

Original article here:

https://web.archive.org/web/20120907...kes.moneymag/?
daylatedollarshort is offline   Reply With Quote
Old 08-26-2014, 10:15 AM   #57
Recycles dryer sheets
 
Join Date: Dec 2013
Posts: 390
By choosing to forgo returns one does not have to worry about returns?

Sweet, except I cast the die before acquiring enough funds for that path. The old money verses time equation. In the end the difference we are speaking about is scale? Obtaining the funds to cover your possible life span with fixed assets is great; if not possible then enough to get through a 10 year down cycle is prudent. This is why most folks end up with a 50/50 +/- 10% portfolio in the withdraw phase.

Once you have covered all expense for life, would you then put money in equities to garner some growth? This could lead to a 50/50 mix on a much grander scale. Seems we are back to money verses time, running out of time turned out to be scarier than running out of money for me.
Different strokes, it’s all good.
springnr is offline   Reply With Quote
Old 08-26-2014, 10:16 AM   #58
Administrator
MichaelB's Avatar
 
Join Date: Jan 2008
Location: Chicagoland
Posts: 40,589
Quote:
Originally Posted by daylatedollarshort View Post
If you are using TIPS they work best held in retirement accounts because of the phantom interest issue. Bodie recommends TIPS in retirement accounts. From what I have read Bernstein just leaves it as a general framework with "safe assets" with TIPS as one option. I don't know of anyone who advocates TIPS for taxable accounts.
My earlier comment holds true for TIPs and other fixed income, even in tax deferred accounts, because taxes are not eliminated, just deferred. The marginal tax rate needs to be less than the ratio of real to total interest rate or the portfolio loses value.
MichaelB is online now   Reply With Quote
Old 08-26-2014, 10:48 AM   #59
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Feb 2013
Posts: 9,358
Quote:
Originally Posted by springnr View Post
By choosing to forgo returns one does not have to worry about returns? .
A household with a $3M portfolio experiencing a 30% drop the first year of retirement loses $1M in absolute dollars they may never be able to recover. They give up the chance for growth in return for not having to worry about losing the $1M. At $2M they need a 50% return to get back to where they started.

Some households might not want to risk the $1M drop in return for a chance to earn more. Earning $3M more is not as important as hanging on to the first $3M. In economic terms it is referred to as the law of diminishing marginal utility.

Or a household that can live off pension income may have $250K and not want to lose $75K early on in retirement.
daylatedollarshort is offline   Reply With Quote
Old 08-26-2014, 10:50 AM   #60
Full time employment: Posting here.
 
Join Date: Apr 2011
Location: Castro Valley
Posts: 788
To answer the OP question, my SWR for a 50 year old would be:

3.5%: Absolute maximum. Definitely worried I will run out of money.
3%: Good, but not great. Still a little worried.
2.5%: Great. Now I feel good. Reasonably confident I won't run out of money.
2%: Golden. No worries at all.
jkern is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Chart of Withdrawal Rate - Success Rate - Yrs Retired Midpack FIRE and Money 28 10-05-2013 11:02 AM
39 year old doing retirement analysis for 70 year old parents grayparrot Hi, I am... 21 01-07-2012 10:14 PM
10-Year Old Releases Demon of 55-Year Old Opera Singer calmloki Other topics 9 08-12-2010 11:09 AM
44 year old woman takes advantage of 13 year old boy Dawg52 Other topics 37 05-24-2006 11:15 PM
New Calculator - Max Sustainable Withdrawal Rates kmarbach FIRE and Money 13 03-19-2003 12:28 AM

» Quick Links

 
All times are GMT -6. The time now is 07:15 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2024, vBulletin Solutions, Inc.