Three buddies

[joylesshusband]

A few recent threads in this forum stimulated me enough to share this story:

Moe, Larry and Curly are buddies and bachelors, all approaching 60, and with similarly sized nest eggs invested 60/40 in equities/bonds. Their tax status and rates are the same as well. All live within their means, plan to retire soon, and have calculated modest but comfortable retirement budgets. They have chosen to ignore any possible SS benefits (which, while small, are also equal for the 3). They have similar family histories of longevity and believe they would not make it past 85, but just in case decide to target 30 years of retirement.

Due to circumstances, Moe manages to retire just around Christmas, while Larry and Curly postpone their exit from the workforce by one year. At the start of his retirement Moe has $1m, and having read the Trinity study and run the numbers in Firecalc, he withdraws $40,000 to cover for his first year of expenses.

The next Christmas Larry and Curly, having added a bit to their savings, are hanging up the gloves. They are excited to enter their retirement on New Year's Day.

Unfortunately, the markets crash the last week of the year and our 3 buddies incur a severe blow to their nest eggs. Each of the 3 is left with a $700k pot. On Jan 1st they reassess their annual withdrawals.

Moe believes that no matter what the market does, he would be safe to withdraw the same amount as the previous year, adjusted for inflation. Luckily, the inflation is Zero, so Moe decides to pull another $40k out.

Larry is also familiar with the studies regarding a SWR, and being the ever cautious and conservative fellow he is, decides to start with 4% of his pot, for a $28k withdrawal.

Curly, whom I might have told this story previously, has spent lots of time pondering the possible scenarios and their outcomes in his usual unorthodox manner. Thus, he thinks like this:
“Moe is a smart chap, and he has valid reasons to believe that his strategy is sound. The Trinity study confirms it and Firecalc is in agreement. He and I have equally sized pots, equal time horizons of 30 years, equal AA, and if it is safe for him to withdraw $40k for his second year, it should be safe for me to do exactly the same and start with the same withdrawal. All else being equal, I am not going to incur a risk any higher than his in outliving my money as long as in the future I do the same annual adjustments for inflation as Moe does.”
So Curly pulls $40k out of his pot, amounting to a 5.7% starting WR.
---------------------------------

Two questions:
1. Is Curly's probability of success any different from Moe's?
2. Why not?

 

[NW-Bound]

Of course Curly and Moe will share the same fate. If they invest the same way, and withdraw the same amount each year in the future, their portfolios will track.

Note here that we ignore a small detail. That is if the market goes down 30%, then at the start of the 2nd year, Curly will have $700K but Moe will have only $960K x 0.70 = $672K.

The difference between Curly/Moe and Larry is that it is more likely that at the end of the 30-year period, Curly/Moe will be close to being broke, while Larry will die with a lot more money than the first two.

 

[RobbieB]

Larry will always have more dough because he can play the violin. Curly has a weakness for women and Moe...

Well he has to help Shemp who blew all his dough on wine women and song.

 

[joylesshusband]

Note here that we ignore a small detail. That is if the market goes down 30%, then at the start of the 2nd year, Curly will have $700K but Moe will have only $960K x 0.70 = $672K.

I'm not sure what is this comment about. In my story there is no mention of markets down by 30%. Just that @ start of 2nd year each has a $700k pot.

 

[Scrapr]

In the long run...both deceased

 

[harley]

I'm not sure what is this comment about. In my story there is no mention of markets down by 30%. Just that @ start of 2nd year each has a $700k pot.

Unfortunately, the markets crash the last week of the year and our 3 buddies incur a severe blow to their nest eggs. Each of the 3 is left with a $700k pot.

You should read the post you wrote.

 

[razztazz]

This was referred to as an internal contradiction or some such moniker of the 4% Rule by a source I can no longer locate. (Could have sworn it was Wikipedia but I just checked and it isn't mentioned.)

Curly is safe. The money and the stock market have no idea whether or not he retired last year or just this morning.

 

[growing_older]

No, Curly is NOT safe. The 4% guideline is for very specific time (30 years) and tracks historic results, to estimate future probabilities. It still has a small percentage of failure cases. By manipulating the starting assumption to take a larger annual withdrawal, Curly is increasing the chances of encountering a failure case.

 

[Cut-Throat]

Two questions:
1. Is Curly's probability of success any different from Moe's?
2. Why not?

1.) Same Risk, as long as Curly's plan has the same end date as Moe's


Neither are 'Safe' - Just safe historically...

The only person that is Safe is one that employs VPW...

 

[Bryan Barnfellow]

Moe's asset allocation plan: "Spread out!"

-BB

 

[candrew]

Curly - "I'm a victim of circumstance"!

 

[marko]

This was referred to as an internal contradiction or some such moniker of the 4% Rule by a source I can no longer locate. (Could have sworn it was Wikipedia but I just checked and it isn't mentioned.)

Curly is safe. The money and the stock market have no idea whether or not he retired last year or just this morning.

I was going to say: "Except Curly is withdrawing $40K from a $700K balance. That's 5.7%." HOWEVER....
On the surface this looks like a simple scenario but the more I think of it, the more I think I'll stand back and see what the more sophisticated posters have to say.
An interesting premise!

 

[donheff]

Curley and Moe are in the same fix (with Moe being in a slightly inferior position as noted by NW). In effect they chose to retire at the same time with Curley not needing to withdraw in year one. But they also chose to go rigidly into a standard 4% SWR and happened to hit a lousy sequence of returns, at least in year 1. If history were a guarantee they would both be safe. Since it isn't they are both at equal risk. Folks around here would undoubtedly apply one of the capital preservation rules and cut spending a bit.

In a broader sense this scenario points to an intuition many of us apply in practice - if equities are over valued at the time we retire we scale the percentages back a little because we fear a bad initial sequence of returns. Of course, if equities are way down when we retire we probably don't up our percentages. We proceed a little cautiously anyway because we probably just watched a big correction tear through the markets leading us to pee our pants.

This concept was explored on a thread long ago when someone asked why not just reset our SWR every time the market hits a new high. Theoretically, the rate remains safe but we are also pushing ourselves onto scenarios that more likely result in near catastrophes. If things are not the same this time around we could crash and burn.

 

[GravitySucks]

Moe now only has 29 more years to go on his 30.
Curly has the full 30.

That's all I could think of.

PS
Curly would have won according to this forum. He died young.

 

[RunningBum]

This is a perfect example of why a 4% WR doesn't give everyone a 95% success rate no matter when they retire. Curly has a much higher WR and therefore would seem to be at more risk, but he is really in the same position as Moe due to Moe's bad start.


Edit: That's probably worded wrong, but I'm trying to get out for skiing today so not too much time to hash out what I'm trying to say. I'll have to think about what my point is and come back later.

 

[pb4uski]

.... Note here that we ignore a small detail. That is if the market goes down 30%, then at the start of the 2nd year, Curly will have $700K but Moe will have only $960K x 0.70 = $672K. .....

I'm not sure what is this comment about. In my story there is no mention of markets down by 30%. Just that @ start of 2nd year each has a $700k pot.

Your OP had an inconsistency because Moe made a $40k withdrawal and then a market downturn occurred... if all the portfolios were IDENTICAL as you stated, then there is no way that they can all have $700k at the end of a year if Moe withdraws $40k and Larry and Curly do not do any withdrawals at all.

 

[joylesshusband]

Your OP had an inconsistency because Moe made a $40k withdrawal and then a market downturn occurred... if all the portfolios were IDENTICAL as you stated, then there is no way that they can all have $700k at the end of a year if Moe withdraws $40k and Larry and Curly do not do any withdrawals at all.

Not at all.
All 3 portfolios could have risen with 4.167% during Moe's first year, thus becoming equal ($1m) just before the market drop. If equities are 50% down, and their AA is 60/40, it would have left all 3 with a $700k.

At any rate, this is immaterial as the proposition is that they start the new year with identical portfolios.

Let's now focus on the 2 questions...

 

[AginMS]

Two questions:
1. Is Curly's probability of success any different from Moe's?
2. Why not?

1. Depends what you mean. If Curly ran Firecalc with a 5.7% withdrawal on $700K, then no, his Firecalc probability of success wouldn't have been the same answer that Moe had during his year one Firecalc run. OTHO, if Moe re-ran his Firecalc numbers for year two, which would also be 5.7% (or a little more if he adjusted his initial SWR for inflation) of his remaining $700K, then yes, they would get the same probability going forward (assuming they are both planning on 29 more years of withdrawals).

2. Why aren't the probabilities different? Because Moe's 4% SWR rate was a snapshot of the percentage he'd be taking for one year. It is not a consistent WR for the next 30 years, just a Curly's 5.7% won't be consistent. On year two, Moe is withdrawing 5.7%, just like Curly, and, all things being equal, Moe and Curly's portfolio will rise and fall with the markets, and the percent they withdraw will also change every year depending on portfolio size, but their actual withdrawal will be the same every year (unless you account for Moe's one extra year of inflation adjusted withdrawal).

 

[Golden sunsets]

Not at all.

All 3 portfolios could have risen with 4.167% during Moe's first year, thus becoming equal ($1m) just before the market drop. If equities are 50% down, and their AA is 60/40, it would have left all 3 with a $700k.
...

This does not make mathematical sense. If Moe started the year with $960,000 and Curly and Larry started with $1,000,000 and the market gained 4.16% before dropping 30%, then the beginning balances in year two would not be the same. And as others pointed out Moe has only 29 more years to the end of his timeline, while Curly and Moe have 30.



Sent from my iPad using Early Retirement Forum

 

[growing_older]

The problem here is adverse selection.

Somewhere in the sequence of possible returns are 5% failure cases. Picking a random starting date you have 5% chance of failure (assuming you don't cut spending or make adjustments as losses develop). But by sliding your spending up to 4% of any portfolio gains each year, you are moving through the various sequences until you hit one where future gains do not sustain the 4% SWR. In effect you are picking a new start date over and over until you hit a 5% failure date.

Now in this example, all three guys may be just fine. One 30% drop does not guarantee a failure case. It actually takes several bad years in a short time frame to push a portfolio into failure mode. But starting with a very bad year as the first in the sequence does increase the chances that the first several years will be bad, since at least one of these is known to be bad.

 

[Danmar]

Points out that “slavish” adherence to the “rule” is less than optimal. Just stay flexible and roll with the punches. Taylor Larrimore has it right.

 

[Chuckanut]

The two guys who worked another year would only need to to go 29 years since they have similar health to Mo. That might keep their heads above water.

IMHO, Mo has ignored sequence of return risk and needs to adjust his withdrawal rate. He is not as smart as his friend thinks. A variable withdrawal plan would help him survive.

 

[ERD50]

This has been discussed many times. Search for "retire again and again", or "retire again & again" - I think those threads show why they should all be able to take the same amount.

-ERD50

 

[mrWinter]

OK I'll play.

Of course Moe and Curly have the same chance of success, in the second year they have the same amount in the portfolio (if I understand your scenario properly) and withdrawal the same amount for all subsequent years, they will behave identically.

Your scenario points out the failings in the constant amount withdrawal strategy. Among all the various compromises it prioritizes having the same amount to spend every year, over all other points. It doesn't prioritize withdrawing the most money from the portfolio, nor does it prioritize leaving either the most or least after death, nor does it prioritize reactivity to particularly bad market runs. Poor Larry will be spending a fraction of what the others spend for the next 30 years, his portfolio is the most likely to survive, but also the most likely to leave tons on the table unspent when he kicks the bucket.

I'm currently of the mind (though I have plenty time to change it) that I'm willing to make the sacrifice of allowing some variance in the amount I get paid each year by my portfolio in order to better allow me to ultimately withdrawal more from my portfolio, and better respond to long term market trends. It appears that a constant percentage withdrawal with a defined floor will do that.

I think the 4% constant amount withdrawal strategy is a useful model just as a quick shorthand, math you can do in your head. To actually follow the rules for a person's entire retirement would in many, probably most, scenarios be crazy. Spending the same amount each year when your portfolio suffers a bad bear, year after year just driving your portfolio into the ground. Or the opposite, sitting on 8 mil but spending 40k a year because that's what the equation said. I don't know but I doubt many people actually do that. People who 'retire again and again' are just doing the constant percentage strategy but adjusting on a less frequent basis.

LM&C could have also used some assessment of the state of the market. Perhaps if they had looked at the CAPE and/or some other measures (if you believe in such things), Moe would have chosen to withdrawal a lower percentage, but after the 30% drop Curly could have gone with a higher percentage (of the remaining) having them both end up with about the same nominal amount.

 

[razztazz]

Moe now only has 29 more years to go on his 30.
Curly has the full 30.

That's all I could think of.

I thought of that first thing but the premise is all had a 30 yr horizon. Not a specified age. So, no Curly wouldn't be looking at a 29 yr time line

Revising and extending: Curly is not "safe" as stated. But he is as safe as Moe +/- one year perhaps.

And VPW is not "Safe" . Sure there will be money left as a mathematical certitude but the food and shelter might run out first. Yes, I know, that means there's money left 'cause you're dead! The whole pernt of all these exercises is to have money only in order to have the things money provides. If you can't get those things the whole "money angle" is moot