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12-14-2004, 06:59 PM
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#1
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Dryer sheet aficionado
Join Date: May 2004
Posts: 44
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SWR Inflation Adjustment
My question may have been discussed before (if so, sorry!) but what is the right (or best) way to adjust your initial SWR for inflation in subsequent years? Say you begin with a SWR of 4% of 500,000 portfolio the first year, for $20,000. If inflation is then 3%, do you:
1) take out 4.12% of portfolio balance the second year, which if grows 8%, minus initial 20K leaves 520K for a second yr. w/drawal of $21,420; or,
2) take out 3% more of the initial w/drawal, for $20,600.
Are there other options? Which is the best for long term succcess? Thanks.
Astroboy
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Re: SWR Inflation Adjustment
12-14-2004, 07:24 PM
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#2
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Thinks s/he gets paid by the post
Join Date: Mar 2004
Location: Dallas
Posts: 1,211
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Re: SWR Inflation Adjustment
Take out what you need ..... no more, no less.
Cheers,
Charlie
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Re: SWR Inflation Adjustment
12-14-2004, 07:44 PM
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#3
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Full time employment: Posting here.
Join Date: Nov 2002
Posts: 768
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Re: SWR Inflation Adjustment
Quote:
,,,take out 3% more of the initial w/drawal, for $20,600.
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That's the way the calculator works.
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Re: SWR Inflation Adjustment
12-14-2004, 07:45 PM
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#4
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Thinks s/he gets paid by the post
Join Date: Sep 2002
Location: Silicon Valley
Posts: 1,008
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Re: SWR Inflation Adjustment
Quote:
My question may have been discussed before (if so, sorry!) but what is the right (or best) way to adjust your initial SWR for inflation in subsequent years?
2) take out 3% more of the initial w/drawal, for $20,600.
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This is the model that FIREcalc uses.
Quote:
Yup. Have a look at this site - http://www.gummy-stuff.org/sensible_withdrawals.htm - for one possible other.
Quote:
Which is the best for long term succcess?
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Why, to take out exactly enough so that you run out of money exactly on the moment that you die. However, to do that you will need to accurately predict investment returns, inflation, and "unanticipated" expenses.
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Re: SWR Inflation Adjustment
12-15-2004, 05:46 PM
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#5
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Thinks s/he gets paid by the post
Join Date: Mar 2004
Posts: 1,318
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Re: SWR Inflation Adjustment
For long run success (portfolio survivability), my inclination/research suggests that the safest way is to take out a maximum of 4% of the nominal portfolio each year.
Obviously that doesn't guarantee you'll keep up with inflation.
But it does help on portfolio survivability, and if markets tank, you'll tighten with confidence in your long run as opposed to giving yourself the full inflation-adjusted withdrawal while losing sleep at night.
A different approach, but one that seems to be easier to keep to over the decades you (might) need to keep with this system.
ESRBob
__________________
ER for 10 years; living off 4.3% of savings (and a few book royalties ;-)
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Re: SWR Inflation Adjustment
12-16-2004, 04:04 AM
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#6
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jul 2003
Location: Kansas City
Posts: 7,968
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Re: SWR Inflation Adjustment
I use FireCalc runs as a ballpark indicator and then ignore it.
We're in the Chuck-Lyn camp: for the last 11 years - took out what we needed plus a little lagniappe on frivolous occasions.
Three glancing hurricane hits plus losing the roof to a tornado were unplanned events.
Inflation is personal - we either pay up or find a subsitute way to adjust.
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Re: SWR Inflation Adjustment
12-16-2004, 04:21 AM
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#7
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Re: SWR Inflation Adjustment
Obviously if you took out 4% of your portfoilo every year, you would never run out of money, no matter what happended.
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Re: SWR Inflation Adjustment
12-16-2004, 08:37 AM
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#8
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Re: SWR Inflation Adjustment
Hi Cut-THroat! At first I said "Huh?", then I "got" it.
That's pretty cute.
JG
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Re: SWR Inflation Adjustment
12-16-2004, 02:16 PM
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#9
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Moderator Emeritus
Join Date: Dec 2002
Location: Oahu
Posts: 26,860
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Re: SWR Inflation Adjustment
Quote:
*Hi Cut-THroat! *At first I said "Huh?", then I "got" it.
That's pretty cute. :) JG
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It works for a 99% withdrawal rate too...
__________________
*
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.
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Re: SWR Inflation Adjustment
12-17-2004, 02:40 AM
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#10
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Re: SWR Inflation Adjustment
Yep!
JG
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Re: SWR Inflation Adjustment
12-17-2004, 04:06 AM
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#11
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Thinks s/he gets paid by the post
Join Date: Dec 2003
Posts: 1,375
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Re: SWR Inflation Adjustment
Quote:
Obviously if you took out 4% of your portfoilo every year, you would never run out of money, no matter what happended.
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Cutthroat: I wouldn't have to self discipline to stick with it forever. I'd probably blow it when it got down to $100.00 left, and go ahead and shoot the works
Not sure if Chuck-Lynn is there yet, and I am about 3 years from the gummint handeling my amount of withdrawals for me. (At least on the IRA side).
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Re: SWR Inflation Adjustment
12-17-2004, 06:55 AM
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#12
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Thinks s/he gets paid by the post
Join Date: Mar 2004
Location: Dallas
Posts: 1,211
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Re: SWR Inflation Adjustment
Yep, I turned 70 this past May 31. OTOH I have
been drawing down my IRA since 1991 and it is
bigger now than when I started. Thank God for
the 90's.
Cheers,
Charlie
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Re: SWR Inflation Adjustment
12-17-2004, 12:03 PM
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#13
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Thinks s/he gets paid by the post
Join Date: Mar 2004
Posts: 1,318
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Re: SWR Inflation Adjustment
Quote:
Obviously if you took out 4% of your portfoilo every year, you would never run out of money, no matter what happended.
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Ha, Ha, Ha!
I'd have trouble getting by on that last 4 cents, though.
Yeah, inflation is the worry, but interestingly, when you look at the historical studies on this approach, you see that the 'actual dollars withdrawn' is higher this way than if you'd made the withdrawals to keep up steadily with inflation.
The reason seems to be that by leaving more in the portfolio during the lean years (when actual SWR would be > 4% due to inflation adjustments on your initial 4% combined with a shrinking portfolio value) leaves more to rebound and your simple 4% later on is out of a bigger portfolio.
In other words, you do less 'selling low'. Gotta love reversion to the mean. Is it the best thing since sliced bread? I have found very little academic verification that reversion to the mean can be counted on by investors, but I guess any system that helps you try to get there, like annual rebalancing, is better than letting your emotions run wild. I used to 'sell low' just by reading the paper and panicking...
ESRBob
__________________
ER for 10 years; living off 4.3% of savings (and a few book royalties ;-)
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Re: SWR Inflation Adjustment
12-17-2004, 02:12 PM
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#14
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Recycles dryer sheets
Join Date: Jun 2004
Posts: 113
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Re: SWR Inflation Adjustment
Quote:
For long run success (portfolio survivability), my inclination/research suggests that the safest way is to take out a maximum of 4% of the nominal portfolio each year.
.
ESRBob
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What is a "nominal portfolio"? I'm not clear on how adjust for inflation each year...is this how one does that?
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Re: SWR Inflation Adjustment
12-17-2004, 03:04 PM
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#15
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Re: SWR Inflation Adjustment
"nominal portfolio" is a "Bob Brinkerism" Jibberish.
JG
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Re: SWR Inflation Adjustment
12-17-2004, 06:28 PM
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#16
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Thinks s/he gets paid by the post
Join Date: Mar 2004
Posts: 1,318
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Re: SWR Inflation Adjustment
Quote:
What is a "nominal portfolio"? *I'm not clear on how adjust for inflation each year...is this how one does that?
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It just means the amount of the portfolio in dollars that year. *You aren't working back to some previous year's inflation-adjusted real value or anything fancy. *Sorry if it is giberish -- nominal just means the actual dollars with no inflation adjustment.
If you ever want to sober yourself up, make a little spreadsheet and put in 20 columns, and see what happens to the real value of your portfolio after 20 years of 3% inflation (which we all agree is nothing, right?)
Let me know if you need help on the formula.
20 years pretty much knocks you in half in real terms. So normally I only care about real values of anything. * Imagine what a 60-year retirement would do to real values!
With my SWR approach, though, the system works by taking 4% of the nominal dollar value and that is what makes it both safer long term for portfolio survivability ( defined as the real value of your portfolio being likely to be maintained, not that the portfolio won't crash to $0.00 -- it never can by definition! )and conversely, leaves you exposed to rising and falling withdrawals based on portfolio performance. *
In other words, you're not giving yourself a COLA'd annuity here; your annual spend is rising and falling with your portfolio performance. So you absorb that adjustment year to year in order to increase the probability of maintaining real living standards over several decades. *A tradeoff that works for me.
__________________
ER for 10 years; living off 4.3% of savings (and a few book royalties ;-)
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Re: SWR Inflation Adjustment
12-18-2004, 05:46 PM
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#17
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Recycles dryer sheets
Join Date: Jun 2004
Posts: 113
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Re: SWR Inflation Adjustment
So it is 4% of whatever the portfolio is worth at the beginning of that year?
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Re: SWR Inflation Adjustment
12-19-2004, 12:33 PM
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#18
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Thinks s/he gets paid by the post
Join Date: Mar 2004
Posts: 1,318
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Re: SWR Inflation Adjustment
Quote:
So it is 4% of whatever the portfolio is worth at the beginning of that year?
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Indymom,
Yes-- that is how I do it. Seems so simple!
__________________
ER for 10 years; living off 4.3% of savings (and a few book royalties ;-)
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Re: SWR Inflation Adjustment
12-20-2004, 03:11 PM
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#19
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: May 2004
Location: SW Ohio
Posts: 14,404
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Re: SWR Inflation Adjustment
I agree with ESRBob, and will be using that method--take out a certain percentage of the balance at the end of the year (probably 3.5% for us). It seems like the best way to avaoid entirely running out of money.
- Adjusting for inflation in your annual payouts greatly increases the risk of running out of $$. If you want to be protected for inflation, the best approach is to buy securities to do that (TIPS, I-Bonds, maybe even gold mining stocks, etc)--then, when you take out your fixed percentage of the balance at the end of the year, the balance will have gone up some amount to cover inflation. But--choosing these investments does forfeit the upside potential of owning other things (value stocks, bonds paying more, etc).
- Of course, everyone has a unique situation. For example, the bulk of our retirement income comes from an inflation-indexed pension, which makes it less painful to take a fixed percentage of our investments each year without adjusting for inflation. But, I'd do the same thing either way.
samclem
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Re: SWR Inflation Adjustment
12-21-2004, 04:23 AM
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#20
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Full time employment: Posting here.
Join Date: Apr 2004
Posts: 802
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Re: SWR Inflation Adjustment
Hopefully your portfolio has increased at year end after withdrawals. This gives you some inflation protection.
In my own example, as of yesterday, my investments have been up ~8% for 2004, and I withdrew 5%.
2003 was also positive.
1997 through 2000 were all positive.
2001&2002 however were negative.
I maintain a 60/40 balance, with the 60 consisting of 60% Canadian, 20% American and 20% Global. The 40 is all Canadian fixed income and cash.
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